Are Home Loans Being Diverted to Builders?

A nasty corollary of cheap loans is that instead of funding the dreams of home owners, the loans are being diverted to builders and developers. This could be another reason why builders can continue to hold on to inventory, resulting in huge developments priced at inaccessible costs.

Take the Nahar group for instance, which has entered in to an agreement with HDFC to pay a home buyer's EMI until the time the flat is constructed, which takes about 2-3 years. You pay the 20% down payment, and they pay the EMI for 3 years. Nice idea, except we do not know if the flat which you are paying for is actually worth the price. Remember there are no free lunches, and hence all the costs are written in to the deal.

This is similar to what triggered the US boom in real estate, when loans on exhorbitant properties were sold to those who could ill-afford them in the long run. Who says we do not have a subprime crisis looming?

This specific case of Nahar, simply means, HDFC funds the construction of the building by paying the money upfront to the builder, which borrows money at home loan rates meant for individual home buyers. This means the developer itself has become a home buyer in its own construction.

Completely laughable! In any other business, Nahar would be paying at least twice this interest rate. As I see it, this is a clear loophole, which many developers in connivance with banks are exploiting. The Raheja and Nirmal groups are also reported to be using this route to fund their projects, in which they are offering to pay the EMI for potential home buyers.

Wake up, Mr Chidambaram!