Budget pushes buyers into no comfort zone

Photo:K.R. Deepak

Disappointment: The Budget has left the Home Loan front in no-comfort zone.

For all the expectations that preceded its presentation, Budget 2009-10 is a huge disappointment for the real estate sector.

In fact, it has turned out to be a `non-event’ for the housing industry. Budget is an income-expenditure statement of the Government.

“A single budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so,” said the Union Finance Minister, Pranab Mukherjee while presenting his Budget. This statement gives a window of hope to all aggrieved segments of the industry.

Nevertheless, Mr. Mukherjee’s Budget has left the real estate industry and the home loan seekers disappointed. The Finance Minister has opted for a heavy spending to spur demand.

In the process, he has chosen to borrow and borrow heavily . He has projected the Government to borrow in excess of Rs.4 lakh crore in 2009-10.

This represents an over three-fold increase in borrowings compared to the budget estimate of 2008-09. The catch lies here.

The corporate borrowers and others will vie with the over-spending Government for the money in the system. This competition is bound to push up interest rates.

Will the Government go back to former times and regulate the interest rates? This looks far fetched at the moment.

Home loans these days are linked to the variable interest rates. By moving over to the variable interest rate-based home loans, housing mortgage providers often justify their asset-liability mismatch (where they lend for long-term while themselves borrowing for medium-term).

In a situation like this where there is a slowdown and a lurking danger of rising interest rate, any housing loan firm will not sit in a comfort zone just because it has lent at variable interest rates. It is likely that the interest rates will have to be raised.

Home loan-takers, perhaps, would manage if the rise in interest rates lies within a reasonable band. What if the rates rise faster and go beyond a band?

Like the proverbial sword, an ever uncertain interest regime is holding the home loan-takers on the edge.

What really is the remedy? It lies in opening up the long-term debt market. Insurance firms, pension funds and the like are the right candidates with resources to be led into the long-term debt market.

A robust long-term debt market will rid the sellers and buyers of the home mortgage products of the persistent worry over the oscillating interest rates.

The Finance Minister has haltingly moved to woo the salaried class with marginal sweeteners in the form of a small increase in personal income-tax exemption limit. Any savings made through this would be offset by range of things from rising petrol prices to possible increase in EMI.

There were widespread expectations that Mr. Mukherjee would increase the interest limit for tax concession on home loans. But he didn’t do that.

The Finance Minister did, however, bring some limited cheers to home loan providers by announcing an allocation of Rs.2,000 crore to the rural housing fund of the National Housing Bank (NHB).

In the absence of a long-term debt market, the Finance Minister could have at least let the NHB issue tax-free bonds to step up re-finance to banks and housing loan companies.

Budget 2009-10 is indeed a big let down for the real estate industry, housing loan providers and home aspirants alike.

May be the Finance Minister is looking into options outside the Budget to remedy the situation on the ‘home’ front.

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