Home Loan Interest: Still a Distantdream

The present reduction in the home loan interest rates is not enough to boost sales as it has to be matched with a correction in prices and rational pricing, says Shri Ram Shaw

The financial world may be facing uncertain times, much speculation could be going on over the rise and fall of real estate prices, but one fact cannot be ignored - land and property continue to be hot investment favourites.With banks decreasing their interest rates marginally on home loans and the real estate developers yet to oblige the appeals made by the former finance minister P Chidambaram (now home minister),NAREDCO and CREDAI to cut prices, a stalemate seems inevitable. Under the current scenario, consumers (home seekers) are in a fix.Several realty experts opine that the present reduction in the home loan interest rates is not enough to boost sales. It has to be matched with a correction in prices and rational pricing.

The move by the finance ministry and the Reserve Bank of India (RBI) to beat the slowdown and boost demand in real estate sector does not seem have borne any fruit, thus far.

The much-hyped cut in interest rate in home loan has not created any loan rush - for one single reason - it was inadequate. “It’s too less. Buying a house is still not affordable. Like inflation, rate of interest also should be brought down to the single digit level,” says Sunit Haldar, a resident of Mayur Vihar who is looking for a flat to accommodate his growing family.

The home-seeker takes a decision of buying a house, usually once in a lifetime. He thinks a hundred times before committing to a long-term liability of loan repayment, before approaching the bank, or negotiating with the developer. He knows his math better than anyone else. For him the real push to go for the flat would be if it were within his affordable bracket. But, in the case of recent rate cut, the reduction was lacklustre.

For example, the EMI for the loan amount of Rs 20 lakh for a 15-year-tenure at the earlier rate of interest of say 13.5% was around Rs 26,000. If the rate of interest is reduced by only 0.75% to the level of 12.75%, then the effective EMI would be around Rs 25,000. The recent reduction in rate of interest by 0.75% would reduce the monthly burden only by Rs 1,000. Now consider the same case from a different angle. If EMI is Rs 26,000, the monthly income of this person would have to be a t least Rs 60,000 to Rs 70,000. Will reduction of Rs 1,000 matter to this person? Will he be rushing to raise a loan to save just Rs 1,000?

Thus, one could not see a rush at the home loan counters as a result of banks lowering the interest rates. “High interest rates are choking the demand” turned out to be a weak argument as lower rates did not trigger any demand from the home seekers. RBI could pump in the liquidity but the affordability couldn’t be increased. Initiatives fell flat in pushing the home seekers to the site as they are still sitting on the fence, with no home, worth the value, in sight.

As far as developers are concerned, they have relented to the appeals of Chidambaram. National Real Estate Development Council (NAREDCO) and Confederation of Real Estate Developers Association of India (CREDAI) have asked their member developers to cut the prices in the range of 5% to 10%.

Rohtas Goel, chairman of NAREDCO, says that price cuts will help escalate real estate demand and reduce the burden on customers. According to Kumar Gera, chairman, CREDAI: “ We are advising the members across the country to make every effort in lowering prices to the levels possible.This will have a desirable impact and cascading effect on employment in the industry, as well as on more than 170 other industries. It will also have a telling impact on the economy and country as a whole.”

Addressing corporate heads and business leaders at the India Economic Summit in Delhi (organized by the World Economic Forum and the Confederation of Indian Industries), P Chidambaram said: “ Hotels must cut tariffs, airlines must cut prices, real estate must cut rates of apartments and homes they sell, car makers and two wheeler makers must cut prices.”

But the real estate developers have their own view. They say this won’t work until lending rates are also slashed. Whatever correction was to happen has already taken place. Today there is no cushion or margin for developers to further reduce prices.

“We have already cut prices, which has brought our margin down to 15% from 30% last year.If we cut prices further,our margin will get wiped out,” said Emaar MGF, MD, Shravan Gupta.

“Prices are a function of demand and supply. Today supply is far ahead of demand,” says DLF chairman K P Singh. A Unitech spokesperson said price cut was a “good idea”. The group has launched a number of affordable housing projects in NCR. Parsvnath Developers’ chairman Pradeep Jain says price cut is unlikely even though builders may focus on smaller size homes to bring down overall cost.