India takes steps to boost the housing sector

India has started off its efforts to boost the sagging housing market. While the markets have cheered the steps of the State Bank to boost the housing market – these steps look eerily familiar to the artificially low interest rates during the Greenspan era – that led to the housing market boom and bust in the United States.

Here’s a look at the new measures:

1. Cheaper Loans: The Public Sector Banks have announced that housing loans up to Rs.20 lakhs will be given out at 8.5 – 9.5% per annum for a tenure of 20 years till 30th June 2009. After that, interest rates are expected to go up to the 10% mark – they currently hover at.

Similarly housing loans up to Rs. 5 lakhs (20 year tenure) - will be given out at a maximum interest rate of 8.5% for the first five years

2.  Lower Margin Requirement: The minimum margin requirement for a home loan for less than Rs. 5 lakhs has been reduced to 10%. It was earlier around 20 – 25%. That means that you can now own up a home by footing only 10% down. The margin for the – less than Rs. 20 lakh loan – has been reduced to 15%.

3. Fee waiver and and other freebies: The Public Sector Banks wil waive off fees like – application charges and remove pre – payment penalties. Home-owners will also be given free insurance on their loans.

About four – fifths of all home loans disbursed in India fall under the less than Rs. 20 lakh category, and, these steps are expected to stimulate the housing demand, by, about Rs. 20,000 crores. Since, these rates and fees are artificially lowered – the banks are expected to take a hit of about 2 – 3% on their margins.

A Housing Boom or a Housing Bust?

These artificial measures will lead to stimulating the housing market, which should really be deflating a little. The Indian housing market has rallied up so much in the last few years; that owning a home has become out of the reach of a large segment of the population.

The rents have not risen as widly as the housing prices and in a lot of places the rental yield is less than 1 percent!

People were buying second and third houses – expecting prices to go up, and this was turning into a massive speculative bubble.

The recent slowdown helped stabilize prices a bit, and the market was taking corrective action . The government is intervening with the market adjustments, tinkering with interest rates, and trying to boost demand artificially.

This may well be the beginning of inflating a bubble – much bigger than what this economy will be able to handle when it bursts a few years down the line.

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