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Up for sale: Fluctuating interest rates and higher EMIs have forced many to sell their houses

At the time of writing this piece, the Federal Housing Administration (FHA) has been engaged in a huge rescue package aimed at preventing foreclosures and infusing some fresh blood into the ailing housing segment, which normally contributes substantially to the U.S. GDP.

The package, which is reported to be the brainchild of the Democratic party, is awaiting the House vote, though the President, who has veto powers, is said to be not in favour of such a measure. The Democrats hope to muster support of quite a few influential Republicans to the move.

Before we go into the details of the package and the merits and demerits of the move, a critical analysis of the real estate sector and a look at its journeys in the past 2-3 decades will be worthwhile to understand what lead to the present state of affairs. Indian real estate could also draw a few lessons in the process.

The U.S economy, as most of us know, is a cent per cent private sector kettle. The Federal Housing Administration Department, like other administrative departments, is the watchdog and yet, no periodical housing policies are proclaimed by it. The American Central Bank, viz., the Federal Reserve, plays a surveillance role on the economy’s journeys, albeit the belief that U.S economy is infallible. Because of the huge natural resources and the high level of GDP growth, small hiccups here and there is no headache to the Federal Reserve.

It is interesting to note that its erstwhile chief, Allen Greenspan, during his marathon stint in office for over three decades, refused to take note of the slip-back in economic growth, especially since he may not have liked to retire with a ‘weak economy’ tag on his neck. Even his successor Bernenke refused to move away from the stand taken by his predecessor till October 2007 when the benchmark interest rate was reduced by 1.5 per cent within a week’s time, followed by further cuts, the last cut posting a rate of two per cent, down from 4.5 a year ago.

The real estate boom in the U.S. began a quarter of a century ago when the white collar Asian population started investing in houses with the twin objectives of wealth building and tax savings. What started as a wait and watch action turned out to be a mammoth growth path in the Eighties and Nineties when the real estate developers and financiers put most of their otherwise idle money in the housing sector.

Tax exemptions too came in handy. Capital gains were exempted from tax liability. Townships and housing complexes came up everywhere. Long-term mortgage loans became the main lending avenue for banks, with practically meagre EMIs. Interest rates hovered around two per cent. All this encouraged prices to sky rocket.

Supply of ready-to-occupy apartments exceeded in large measure compared to the demand. Unbridled expansion and reducing returns from dead investment lead to uneconomic business, the home sales falling to a seven-year low in August ’07, eight per cent less than the previous year.

What transpired finally was the accumulation of bad loans which needed to be written off in one form or the other like foreclosures, provisions, Government support and credit crunch in real estate loaning.

The major proposals are:

• Insurance against foreclosure.

• Three per cent fee to be levied by the FHA.

• 1.5 per cent premium will be charged on the insurance.

• $ 300 billion will be the outlay, only for new mortgages to struggling home owners.

• Foreclosure loss up to 40 per cent will be made good to the borrowers.

• Cheaper loans to first-time home buyers — up to 90 per cent of home value at zero per cent interest for 15 years.

• Borrowers have to share future profits from the related property with the FHA.

The real estate sector in India is still uppish and except finding resources to fund, we are not sceptical about the future, as far as one can see. But, are we not too optimistic? Will not the rising inflation affect, one day or the other, real estate as well?

Are we not to learn from the loan waivers/write-offs in farm loans? Will it not be foolish to turn a blind eye to the disasters affecting strong economies of other countries such as the U.S, Japan and some in Europe?

Will not the rising land value, the steel and cement cost, despite temporary efforts by the Government to contain the prices, affect the repaying capacity of the home buyers? And, last but not least, will not the interest rate on home loans, though not rising sharply, make the loans costly, and over the years make it burdensome, especially to the small borrowers?

Increased supply may not be the deciding inflation factor here whereas the cost of supply may decide the quality of the loans and sustainability.

Let us not, therefore, ignore the warning signals which are clearly visible. Some pre-emptive action points can be:

• Restrict the unbridled expansion.

• Let the proposed regulator be put in place without delay.

• Preventive action may be initiated against speculation.

• Encourage only genuine builders and buyers.

• Prior booking of 100 per cent units in large housing complexes be made compulsory.

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