High prices, not interest rates, hurting home sales: Rajan

Reserve Bank governor Raghuram Rajan on Thursday said high home prices and not interest rates are deterring home buyers – that the huge accumulated housing inventories are the result of jacked up prices and not interest rates.

Stating the obvious that realty developers should better manage their prices so as to make them affordable to majority of home seekers and that any reduction in interest rates would not help attract buyers to over-priced property.

The RBI governor merely stated, "It would be a "great help" if realty developers sitting on unsold stock bring down prices…Once the prices stabilise, more people will be keen to buy houses."

Rajan said property prices need to fall before interest rates on home loans come down, any further. "I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don't want to create a situation where prices stay high at the level which means demand can't pick up," he said.

The governor was replying to real estate companies, lobbies and others associated with the sector who demand interest rate cuts at a drop of a hat.

Obviously, the push by real estate lobby to sell whatever at their disposal at jacked-up prices will only help to inflate the real estate bubble further, he added.

It may also be noted that even at high interest rates home loans given by banks continue to grow at a very brisk pace. As per RBI's latest monthly data on sectoral deployment of credit, the total amount of home loans given by banks grew 15.6 per cent to Rs6,53,400 crore year-on-year in June.

In comparison, overall lending by banks grew just 7.3 per cent.

Against this, home loans had grown by 17.1 per cent to Rs5,65,000 crore in June 2014 while overall lending by banks had grown by 12.8 per cent during the month.

Also, banks have given out Rs88,400 crore of home loans in the last one year, which for around 21 per cent of all the lending carried out by banks, while home loans formed around 12.7 per cent and 12.2 per cent of the total loans given by banks in the years ended June 2014 and June 2013, respectively.

Clearly, the unsold stock with realty firms is the overpriced homes and this will remain until prices fall – people just will not buy overvalued property.

The only way this situation can be corrected is if home prices fall, which is precisely what Rajan said.

While in the US, Federal Reserve chairman Alan Greenspan failed to act forcefully on the realty bubble when he was in power between 19881 and 2006, even as he spotted an ''irrational exuberance'' in the realty market, Rajan thinks RBI or any other central bank has a role in spotting such bubbles in the economy.