Home prices inflated; aggressive lending dangerous: Deepak Parekh

Terming the home prices as highly inflated in the country, including in smaller cities, industry leader Deepak Parekh on Friday asked builders to focus on affordable housing, rather than luxury homes, and said it is a dangerous thing to lend aggressively to developers.

Parekh, Chairman of the country's largest housing finance company HDFC, also asked the home buyers to be cautious of 'too-good-to-be-true' offers from the property developers and warned them against schemes where builders claim of paying interest on the borrowers' loans.

The eminent banker also asked the financing companies to stay away from innovative and aggressive loans, including teaser rates where the interest rates rise gradually and lending money to developers at the same rate as being offered on individual home loans.

While lauding the growth in the home finance market over the years, Parekh in his annual letter to shareholders of HDFC said: "As a basic tenet, construction finance entails higher risks and, therefore, such risks have to be built into the pricing.

"Construction finance should not, through any innovative structuring be available to developers at the rate of interest being offered on individual home loans. Further, complete up-fronting of construction finance to developers, even before the ground is broken is dangerous," he said.

Parekh also said the country continues to face an acute housing shortage, but prices continue to remain high.

"Having spent so many years in this business, one recognises that one's voice can never be loud enough when so many vested interests exist as far as land markets are concerned. Nonetheless, I am of the firm belief that one must not give up or be beaten down to silence.

"At the cost of perhaps now sounding like a broken record, I continue to hold the stance that increasing supply is the only way home prices can come down in India. Even in Tier II and Tier III cities, home prices are inflated," he said.

Parekh, however, lauded the role of a new breed of entrepreneurs and first-time developers who have ventured into the affordable housing space.

"Such projects may be few and far between, but the trend is encouraging because this is where the real demand lies. Most of these affordable housing projects have been sold out immediately. Hopefully, the more established and larger developers will take a cue and focus on the affordable housing segment, rather than high-end luxury homes that they currently cater to," he said.

Talking about the interest rates where banks offer a low rate at the beginning and later increase them for the home loan borrowers, Parekh said such products were risky and should be avoided.

"To my mind, teaser products, of any nature entail risks. Customers need to be cautious of 'too-good-to-be-true' type of products. Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower's loan for a specified period.

"Borrowers have to be cautious because in the event of a developer delaying payment, the credit bureau reports will reflect this in the borrower's records, thereby impacting his or her creditworthiness.

"Ultimately, developers need to recognise that in the long-run, it is to their advantage to allow a correction in prices which will help their cash flows," he said.