The Centre has come up with a ₹25,000 crore bailout package for the troubled real estate sector. The Centre will contribute ₹10,000 crore, while the rest is likely to come from banks and the Life Insurance Corporation of India. Will this fund help India? Mint takes a look.
1) What’s the idea behind the bailout package?
The idea is to finance housing projects that are currently stalled. Citing industry estimates, the government said there are 1,509 stalled housing projects in India, comprising around 458,000 units. The maximum finance for a single project will be ₹400 crore. The finance will be available for projects with housing units priced up to ₹2 crore in the Mumbai Metropolitan Region (MMR), up to ₹1.5 crore in the National Capital Region (NCR), Chennai, Kolkata, Pune, Hyderabad, Bengaluru and Ahmedabad and up to ₹1 crore in the rest of India. These are the basics of the scheme and they give rise to a few questions.
2 )How can ₹2 cr homes be called ‘affordable’?
In MMR, the government’s ₹25,000 crore fund can be used to finance stalled housing projects with units that are priced up to ₹2 crore. For NCR and other big cities, the limit is ₹1.5 crore. The reason for this lies in the fact that the highest number of stalled housing projects—more than two-thirds—are in MMR and NCR, where prices are on the higher side. In MMR, the average price of a home is more than ₹1 crore. What this tells us is that the government’s package will primarily bail out builders in and around Mumbai and Delhi. Hence, affordable housing is a misnomer in this case.
3) What is the definition of a stalled housing project?
The maximum finance for a single project will be ₹400 crore. Anarock Property Consultants estimates 576,000 housing units across seven key cities were launched in or before 2013 and are yet to be delivered. This is different from the number (458,000) put out by the Centre. It will have to come up with a proper definition of a stalled project.
4) Will the bailout solve the basic problem?
According to real estate research firm Liases Foras, the number of unsold homes in the country is more than 1.3 million. The number of unsold homes in India has risen dramatically primarily because of high prices. Builders have cited higher development costs as a reason for their inability to reduce prices of properties. The bailout package of ₹25,000 crore will lead to a further increase in the supply of homes, but without adequate price cuts these homes are not going to get sold. Hence, the problem will only deepen.
5) What about the moral hazard in this?
An average apartment in a big city in India is priced at more than ₹50 lakh. How many people make the kind of money required to buy such an apartment? Also, with the government’s rescue package, many real estate developers can hold on to the current high prices. This is how moral hazard plays out. No market can keep booming all the time. Sometimes, it needs to go bust as well, to be able to thrive all over again.