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Economy

RBI Says Duh, Real Estate Demand Can Be Driven Far More If Developers Cut Prices

Rajan, in an interview with Arundhati Bhattacharya (Chief of SBI) shows some real gumption when AB asks him:

“I was thinking if it is possible for a little while, could something of this [Teaser lower rate loan for housing, below base rate] could be allowed given the fact that this is one of the portfolio where NPAs are the lowest”.

Rajan shot back, saying that:

I do believe that if real estate developers who are sitting on unsold stocks bring down prices, that will be a very great help to the sector because once there is a sense that prices have stabilised, more people will be willing to buy.

Basically – don’t ask me for concessions, the RE guys should cut prices and that will drive demand far more than teaser loans!

Thats true; there is a lot of unsold stock (and secondary ready-for-sale stock) that’s in the market now, but prices are being held up because the developers aren’t yet up shit creek. They are all expecting that if they can get a little more leeway everything will be all right.

Well, this is a massive bubble and bubbles end badly. The best that a developer can, and should do, is to cut prices and get inventory out as soon as possible. Beyond a certain point, the problem will be with the banks who have funded these guys.

The Unsaid Truth: Banks Should Cut Their Base Rates instead!

What Rajan should have said, in my opinion, is that assuming that SBI wanted to provide for lower rates, they should have cut their base rates!

It is true that if they do cut such rates, every loan will pay lower, even existing ones. That is the true definition of floating rates! And in reality that’s the only way that rates will be transmitted. If banks refuse to cut their base rates, they should be given no concessions.

At this time banks are not cutting rates even though they maintain net interest margins at 3% or more. Until they can learn to recognize the losses that already exist, raise more capital and crunch the NIMs to lesser levels, they cannot compete.

The effort cannot be from RBI – it is time now for us to demand rate cuts from banks, and from developers, by simply not buying until they do.

  • Gold Bug says:

    Gov. Rajan seems to be in fool’s paradise Builders/Devvelopers will never cut prices. They support a vast network of Political/State Govt; entities who will take care of them at any cost. Further NBFCs and Private Equity Funds is always willing to support them by buying debentures from them to ride the rough patch. How long can the buyer’s postpone their decision? History shows Builders/Developers will always win in India.

  • Akshat says:

    Are you going to take another survey in Bangalore after this comment 😉 ?

  • kumar says:

    Sorry Mr Deepak, i do not share your optimism. If you feel this post is too cynical, or off topic, please do not approve.
    in the kingdom of the corrupt, Mr Rajan seems to be the only sane voice. This will not stand, he is going to be run out of town soon.
    This government, like its predecessors, is filled with people who only preach, but do not follow in real life. They seem to think that the business of the country is business, and that is going to lead to a whole lot of unhappiness. And never mind if the current rules prevent it, or the Supreme Court gives verdicts against it, after all, if the government does it, it is legal. One only needs to look at the aadhar project and the porn blocking project to see the intent of this government.
    All this talk of smart cities is a chimera, it is just another way of f*****g the citizens with high taxes, and bad services.
    Add to this, fake qualifications, unqualified people in big posts, and we now have a perfect recipe for a long term disaster in the making, and it is now on slow boil.
    If the previous governments so far have spent tonnes of money, and the services still suck, let’s start with inquiries. We can start by hanging a few big names, and to be fair, maybe 5 people from each party ought to do the trick.
    And for starters, let this government stop doing illegal things, not just for the show [say one thing in the Supreme Court, but do another in reality], but really stop doing illegal things.
    Stop asking for my semen, blood, spit or shit.
    This is my opinion i could be wrong.

  • Anand says:

    Consumers have stopped buying so inventory is piling up. Developers will not cut price unless there is a recession or company is going bankrupt. Otherwise developers think cutting prices is bad practice.
    It is leading to explosive situation.
    If economy picks up, developers are saved. If there is going to be any recession, there will be lots of job cuts. Then forget selling the inventory, there will be lots of defaults in the existing loans and banks would not be able to monetize the mortgaged assets.
    But our economy seems to be turning around. As inflation stays low, RBI may cut rates further and banks will pass it on this time. That would bring relief to deceased real estate. I mean relief and not a healthy growth which would need sustained recovery in the economy for few years in a row.