This article has multiple issues. Please update this article to reflect recent events or fdi in real estate pdf available information. The real estate sector is thought to be collapsing due to increasing costs of financing.
Real estate projects in India take a long time to complete due to a complicated and corrupt regulatory mechanism. Several of the India’s publicly traded real estate firms are in debt. The inventory of unsold real estate assets is growing and it is expected the market will undergo price corrections. Demonetisation of 500 and 1000 rupee notes by Prime minister Modi proved to be the last straw that broke the black money camel’s back. He also said the prices should be falling faster, but due to the lack of transparency in the sector, it is not doing so. Foreign investors could only invest through wholly owned subsidiaries and partnerships with Indian firms. However, foreign investors were not allowed to hold land for speculative purposes.
This increased the cost of funds for the entire banking sector. Among the restrictions was a ban on the purchase of real estate abroad. In September 2013, it was reported that about 650 million sq. 6,00,000 housing units remained unsold at the end of June 2013, according to the research firm Liases Foras. Some builders were seen dropping prices and offering other incentives to buyers. In October 2013, the RBI issued an adivisory to buyers and banks. It asked banks to release sactioned individual housing loan amounts in phases linked to construction stages, instead of releasing the funds as a lump sum.
The unlinked loans used to act as cheap credit for builders. These were called were 80:20 or 25:75 schemes. This loan was used directly by the builder for construction. The builders would sometimes pay the interest on the loans for a period. Under Indian law, the legal rights of a buyer does not change if a lender takes ownership of a project from a defaulter. The buyer can take the possession of the apartment when the project is completed or can sell it to another buyer. There are two separate issues which are often confused and mixed up with each other.
High price can be due to a bubble but that need not be the only reason. High price can also be due to ‘Permit Raj’. A brief explanation is as follows. Often the real estate sector is subject to considerable controls and regulations that are over and above those that are warranted to take care of congestion, orderly development, and minimising negative externalities. Such controls lead to a restricted supply and so the price can be high.