Real issue is overpriced realty- EMI is big headache

PRLog (Press Release) - Nov. 8, 2011 - Our home loan EMIs are unaffordable not because interest rates have suddenly gone up (they have, but that’s not the main reason), but because the properties we bought were bought at inflated prices.

The question to ask is not why are rates so high, but why are property prices unaffordable? The answers are simple: politicians, builders and criminal elements are artificially restricting supplies of land and building permits to keep land values rising – since this is where they hold their own ill-gotten wealth in benami names. While there is a real shortage of urban land, the shortage is not of a magnitude where there is no urban property in Mumbai or Delhi available below Rs 1-2 crore. Realty prices can keep rising only where land is scarce.

In fact, high interest rates are forcing builders to lower prices and inventories of unsold properties. Despite the short-term pain of higher EMIs, the only way to hurt the land sharks is to reduce demand for property. It is also good for people if they don’t splurge on property they cannot afford. The people who are hurting with higher EMIs probably bought properties they couldn’t afford on the assumption that rates will keep falling or that incomes will keep rising. This is the bitter lesson of the last decade of high loan growth.

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Next, let’s look at oil prices.

Mamata Banerjee has raised a shindig because she was not “consulted” on the petrol price hike. But Pranab Mukherjee punctured her bombast when he pointed out that she was party to the decision to decontrol petrol prices last year. So she had no need to be consulted on a matter in which even the government wasn’t quite consulted. It was a decision by the oil companies.

Even so, petrol users are asking why have petrol prices been raised so often, when international oil prices are stable or falling? It is the right question, but does not go deep enough. The surface answer is the rupee has depreciated.

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