The possibility that returns in the housing sector are, from an aggregate national point of view, merely nominal gains, has an additional implication. We know that India faces a shortage of funding for critical areas of the real economy like infrastructure. Given the funding that we have, we therefore need to develop our equity and bond markets and not divert resources and valuable banking balance-sheet space to housing — which is not directly productive in this case. In the medium term, the government could look to check house price growth by disallowing the ballooning of housing-related credit on banks’ books. It is also worth bearing in mind that equity and bond markets give investors much greater liquidity compared to housing.

There is, it is true, at least one benefit from higher house prices: people feel richer the more their house is worth, and the resulting “wealth effect” makes them spend more. This is, however, only effective in the short term. In the long term, the wealth effect is outweighed by the dysfunctionality it brings to the economy and financial system. And these distortions will become that much more difficult to undo as political constituencies become more entrenched. The Indian economy and financial system would then risk evolving into the model where the banking system became heavily dependent on asset price rises and illusory profits rather than on productive lending to the real economy.

Of course, the argument need not be just an economic one. Those concerned about cultural heritage could make the argument that a spike in house prices — such as in Bombay for example — has led to a surge in hastily-erected (and unsafe) structures and resulted in once-charming neighbourhoods losing their character and increasingly taking on a pockmarked and dishevelled appearance. The social and judicial ramifications are also significant. Rising property prices have spawned disputes as families squabble over property which in turn has helped to clog up the judicial system; a large proportion of the 40-lakh judicial case backlog is property-related.

... contd.