RBI's affordable housing boost is advantage builders: How black money is the real winner

In a major boost to the housing and infrastructure sectors, the Reserve Bank of India intends toease raising long-term funds by banks for infrastructure financing, while it has accorded infrastructure status for affordable housing projects, which will result in cheaper credit for such projects. The move is in line with the BJP government's manifesto, which promises affordable housing to all by 2022 but here's the caveat: it will encourage black money transactions andwill only help unorganized developers dealing with the grey economy.

The RBI has tweaked the definition of affordable houses and has saidhome loans up to Rs 50 lakh in metros and Rs 40 lakh in non-metros given by banks from the proceeds of long-term bonds will qualify as affordable housing loans.

Here's what it means for the housing sector:

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Under the current regime, housing loans up to Rs 25 lakh in metros and Rs 15 lakh in non-metros are considered as affordable housing loans and fall under the priority sector lending category for banks.Thisdefinitionhas now been tweaked suchthathousing loans up to Rs 50 lakh in six metros (Mumbai, Chennai, Kolkata, Delhi, Hyderabad and Bangalore)and up to Rs 40 lakh in other centres have been included under this. This means interest rates could come down on affordable housing loans given out of proceeds of long term bonds.

"It is a huge encouragement for the housing sector. It will help more money come into the system," Keki Mistry, HDFC , CEO told CNBC-TV18.

New definition of affordable housing can revive volumes in the industry

According to Pankaj Kapoor, MD at real estate firm Liases Foras, the new definition will bring about 50 percent of existing supply under the purview of affordable housing , especially in large urban centres against the existing 10-15 percent supply.

" With improved affordability and funds, real estate volumes will surely revive, Kapoor told Firstbiz.

Little wonder that therealty index was up over 1 percent on the Bombay Stock Exchange today with Prestige Estates up over 2.56 percent, Mahindra Lifespace up 3 percent, Godrej Properties up 2.25 percent, Purvankara Projects up 3.33 percent, Oberoi Realty up 3.4 percent and DLF up 1.74 percent.

Builders in the affordable housing space have been seeking attention from the government for a long time. "Since these projects work on thin margins, not many developers were keen to consider it. Now, with cheaper and long-term funding, we expect more developers to evaluate the affordable housing option," saidShobhit Agarwal, Managing Director - Capital Markets, JLL India.

Little relief for home loan borrowers

The current mortgage lending rates range between 9.95-10.5%. "With the revised definition of affordable housing the rates may lower to 8.45% for Rs 50 lakh housing loans, said real estate Parikshit Kandpal, analyst at Karvy Broking.

However, according to brokerage Edelweiss, the RBI move will surely enhance availability of funds to the sector but will not significantly impact home prices, since interest rates for home loan rates presently (10.25 percent) are already near base rate (10 percent). As per RBI norms, banks are not allowed to lend below the base rate.

"Increased rate competition will be limited in HDFC and LIC Housing Finance . As most banks offer home loans near base rates, impact on interest rate cuts will be limited," the brokerage noted.

RBI will also periodically review the definition of affordable housing on account of inflation.

According to realtors' body Credai, the move will lead to lower interest rates for affordable housing projects and help developers mobilise cheaper finance for these projects that will result in lower prices in the long term.

"It is expected that the home loan rates may also come down because of this move," NAREDCO Chairman Navin Rajeja said in a statement.

Second bonanza for industry post the Budget

This is the second bonanza for the real estate sector as finance minister Arun Jaitley had allocated Rs 4,000 crore for low-cost housing schemes while presenting the Union Budget for the year 2014-2015. He also indicated that there will be a relaxation of FDI norms for the affordable housing sector.

The budget also increased the income tax deduction limits under 80C, of which the repayment of principal on housing loans is a component. This limit has been raised from Rs 1 lakh to Rs 1.5 lakh. Additionally, the budget has also increased the deduction limit on interest payment for housing loans from Rs 1.5 lakh to Rs 2 lakh. These two factors alone can lead to improved sentiment in the market.

"The real task lies in the fast execution of these initiatives. It is very positive that the government has taken due note of the demand-supply mismatch in the LIG and EWS housing segments, and it remains to be seen how fast these initiatives hit the ground in real time," Anuj Puri, Chairman & Country Head, JLL India said.

But not everybody is lauding the move.

According to an analyst, the RBI move will only encourage black money transactions and help smaller unlisted real estate players. "Most developers will now ask for a larger black component as against the current 60-40 norm. For instance, for a Rs 1 crore house, if the property is registered for Rs 50 lakh, then it will qualify under affordable housing. In order to conform to this, home buyers will be ready to tweak the black money component to 50-50," he said on condition of anonymity.

Mostly, unlisted and smaller developers will make the most of such an arrangement since large listed companies will be more careful in dealing with such transactions.

Secondly, metros like Mumbai and New Delhi will not gain from the affordable housing schemes since majority of the houses here are upwards of Rs 1 crore. Only Chennai and Kolkata stand to gain among the metros where buyers can still purchase a 2 bhk for under Rs 65 lakh.

The ticket size may have been determined based on guideline values rather than market based capital values and hence Mumbai & Delhi may see no benefit from this policy directive," said Parikshit Kandpal.