Reserve Bank of India Governor Raghuram Rajan wants real estate developers to drop prices in order to revive demand in the housing sector, currently in the doldrums with enormous unsold inventories. State Bank of India chief Arundhati Bhattacharya wants banks to be allowed to temporarily drop interest rates below the current base rate, so that potential borrowers, put off by the prevailing high rates of interest, re-enter the market. The last time such ‘teaser’ loans — where borrowers get a lower-than-market rate of interest for the first year or two of the loan, following which rates revert to whatever market rate is then prevalent — had led to a surge in demand for housing loans was after the 2008 global financial crisis had derailed the markets. Both Rajan and Bhattacharya are correct. Unrealistically high prices of housing, particularly in urban areas, are a deterrent for buyers; so are prevalent interest rates for home loans. But will a price fall or interest cut be enough? In fact, prices in the two largest markets in India, the National Capital Region and Mumbai, are said to have already fallen by between 25 and 40 per cent, without any noticeable uptick in demand.

The scale of the problem becomes apparent when we look at the unmet demand. The ministry of housing and urban poverty alleviation estimates that India will need to create an additional two crore affordable dwelling units by 2020. But this is not housing as the average middle-class buyer sees it. This is housing for the very poor, defined by the ministry’s task force as houses of less than 60 square metres area, costing no more than five times the average annual household income. The industry sees this sector as ‘social’ housing, primarily the government’s job to provide. On the other hand, what builders define as affordable — dwelling units in the 60-75 sq m range priced at ₹15-20 lakh — are regarded by many buyers as unliveable, since they are invariably located too far from the main commercial areas where their livelihoods lie, and lack supporting social infrastructure such as schools, hospitals, shopping and entertainment.

This has resulted in the sad and ironic situation in which there are millions of potential buyers, on the one hand, and huge unsold inventories, on the other. Palliatives like marginal price or interest rate cuts will not solve this. What is needed is a systemic solution which addresses the core problems behind unaffordable housing — sky high land prices, as well as speculation and black money. At the same time, the government must address the overall infrastructure needs of home buyers, who need spaces they can live in and not just a roof over their heads.

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