'Increase Supply'

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Executive Director, ICICI Bank V. Vaidyanathan, who heads the bank&rsquo;s retail business, including home loans and property, spoke to BW&rsquo;s Gurbir Singh. Excerpts: Do you think interest rates will fall in the near future? Rates may or may not move down depending on how the cost of funds of the banking system plays itself out over the next few quarters. But hopefully, they won&rsquo;t go up in the near future. Right now the priority is to ride out the March effect, when rates traditionally tend to go up. The banking system needs to plan well so that there is no spiking in March. Since property prices have run up sharply, there is consumer resistance and they have now begun to soften. There is an expectation there will be a long downward cycle in property prices. Do you agree? Prices may go up or down not because they have run up or run down already. It&rsquo;s like saying the stock market will come down because it has run up from 5000 to 15000. It does not go up or down because of how it has behaved, but because of whether the assumptions that have gone into the pricing of the market hold it up or not. Similarly, prices of property go up or down depending on demand and supply. It is a fact that job creation is happening in large numbers. Each year 13 million people are entering the job market. They discount their future cash flows through a loan to purchase property. If there is a slowdown, people feel less confident of their future cash flows. This could affect prices. The second factor is supply. There is no significant supply coming into the market. But the demand is for real. Prices may not therefore come down, though there may be corrections in pockets where economic activity is not keeping pace with earlier expectations. We have to address the issue of prices, and we should do it by increasing supply. What are the significant changes you have observed in the property market? The perception about property has changed. The stock market 15 years ago was seen as a platform for punters and gamblers. Now it is accepted as an investment vehicle. Since it is riskier, people take positions in it depending on their lifestage; today stocks are accepted as part of asset allocation. Similarly, property is becoming a respectable investment class, besides being a utility to live in. This may increase if REITs are promoted. The consensus among property pundits is that property deals are down 40 per cent from what they were a year ago. Builders say the increasing home loan rates are the main factor for stymieing demand. Home loan rates are an important factor but not the main factor. Prices have run up a lot and are now becoming unaffordable. This cannot go on endlessly from Rs 5,000 per sq. ft to Rs 10,000 per sq. ft to Rs.15,000 per sq. ft and so on. Indian property is expensive even by global standards. Prices in Mumbai are higher than in Hollywood! The market has to stop to digest this. Property prices have doubled in two years but income has grown by only 20 per cent in the same period. Finding affordable property is a real issue today. gurbir.singh@abp.in (Businessworld Issue 12 - 18 February 2008)