Home buying: China shows the way to RBI

In the past one year, the Reserve Bank of India (RBI) has taken a slew of measures to make life difficult for real estate developers. But the impact is being felt more by genuine homebuyers, at least for now.

Its recent salvo — banks should not include stamp duty and registration fees while calculating the home loan — will only make things more difficult. Already, borrowers have to pay 20 per cent of the property value from their pockets as the loan-to-value has increased to 80 per cent.

With this new restriction, borrowers will have to cough up 20 per cent of property value plus another five to 10 per cent as stamp duty and registration… in other words, as much as 30 per cent.

In metros, such as Mumbai, Delhi, Bangalore and others where property prices are already on the boil, this is bad news. For a Rs 50-lakh property, one will need at least Rs 13-15 lakh. And we are not even including car parking, brokerage and other costs, which could run into a few more lakhs.

RBI's concerns are legitimate. When a buyer has to shell out 30 per cent of the property price from his own pocket, it becomes difficult to purchase a second or a third property. Speculation, as a result, is curtailed to some extent. But for the same reason, genuine buyers cringe or delay their purchase, and the latter leads to more requirement for funds (assuming property prices will keep rising).

In comparison, neighbour China has taken tough steps to resolve speculation in property. With a series of laws, it made purchasing a second home substantially more expensive. Buyers have to pay almost 60 per cent upfront for the second home. In fact, last year, a leading Chinese daily reported couples are contemplating 'fake' divorces to buy a second home. Property prices, as a result, have fallen four months in a row, reported Reuters. On the other hand, loans for the first home are convenient with even the state machinery supporting it by giving cash subsidies.

In India, while developers have complained about high interest rates, inability to get loans from banks and build-up of inventories, precious little has happened in terms of correction in prices. According to National Housing Bank's Residex data, Kochi, Hyderabad and Kolkata have observed some drop in prices in the past year. But Mumbai, Delhi, Chennai and Pune continue to rise. In Delhi, prices are up by a whopping 35 per cent.

Perhaps, it is time a tough model is followed to curb speculation. Second or third-home purchases can be made significantly expensive, like in China.

In 2010, when State Bank of India was offering its so-called teaser rates, former deputy governor Usha Thorat criticised it with ... 'lower interest rate in the beginning actually lures borrowers. This, itself, has the making of leveraging and putting pressure on housing prices to move up.'

While SBI withdrew its teaser loans in the coming months, the banking regulator's tough guidelines have made it more difficult for genuine buyers to purchase a home. Meanwhile, property prices have continued to skyrocket. Whose loss is it?