Interest rate hike to dampen property purchase decisions

Owning property could become an elusive dream for many prospective buyers after the Reserve Bank of India (RBI) raised its benchmark lending rate, or repo rate, by 25 basis points (bps) to 7.75 per cent on Tuesday.

Repo rate is the rate at which the RBI lends money to banks against securities.

Although most market experts do not expect banks to raise their home loans rates immediately in response, the plethora of uncertainties around this hike will have a bearing on the consumer mindset.

There are two reasons why banks might not increase home loan rates in the near future. Firstly, the RBI, in its policy reduced the Marginal Standing Facility (MSF) by 25 bps to 8.75 per cent to ensure that there was enough liquidity in the system. Secondly, banks are counting on deposit growth to sustain themselves. At present, the banking sector's overall industry growth stands at a healthy 14 per cent whereas the credit growth is 17 per cent.

"Deposit growth has to pick up to support current lending rates. If deposit rates do not grow fast enough, chances of interest rate hike (by banks) will increase," says Shyam Srinivasan, MD & CEO, Federal Bank.

The real estate market is already in the doldrums, which has resulted in accumulation of unsold inventory. For instance, properties are remaining unsold in the top six metros for an average of 31 months after they are ready for possession.  The situation is the worst in Mumbai where the average wait is over 50 months.

"We have a housing shortage situation in the country. Yet the demand is low. This is largely due to lack of affordability," says Pankaj Kapoor, MD, Liases Foras, a Mumbai-based real estate research firm.

When markets were booming in 2003 and 2004, the average unsold inventory period was 8-10 months.

The repo rate hike announced by RBI was intended to fight inflation, which was at worrying levels. But it has had the side effect of affecting consumer sentiment.

"Interest rates play a big role in purchase decisions of property buyers. People, especially investors, who were looking at making investment may hold back their plans for the time being," says Anshuman Magazine, Chairman and MD of real estate consultancy CB Richard Ellis. Magazine is hopeful that home loan rates will not increase, "but a small rise at this point could dampen the festive sentiments of home buyers and will not auger well for the industry."

In some cases, low demand is forcing developers to slash prices. But most price reductions are not 'official'. They are backroom deals that developers negotiate with buyers.

According to the National Housing Bank's Residex, 22 cities, including Delhi, Mumbai, Pune, Bangalore and Hyderabad have witnessed a fall in property prices in the April-June period as compared to the previous quarter. The NHB Residex is an index developed to capture price movements in residential housing across 26 cities. Still, affordability remains an issue.

In a note, Sanjay Dutt, Executive Managing Director, Cushman & Wakefield said developers who were hoping for an improvement in the purchase scenario during festive season might be disappointed. "It leaves them with little choice - to either look at revising rates or come up with innovative marketing schemes or provide with greater value adds to their current offerings," he added.