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— Photo: K.R. Deepak

Future needs: Whether housing activity will gather steam across the country in the wake of the Union Budget remains to be seen.

Before commenting on the future interest rate scenario, it is worth looking at the current property market. The market can be divided into three categories — low, mid and luxury segment. What lies at the bottom of the pyramid is property in the range below Rs. 25 lakh where the buyer predominantly relies on home loans and ends up borrowing as much as Rs. 18-20 lakh. This category is defined as priority segment in banking circles and the Government too has stepped up its focus on this category of borrowers as they are large in number.

The second layer of the pyramid is generally dominated by middle and upper middle income group and has the potential to borrow loans in the range of Rs. 25-75 lakh. In the last few months of property correction, this is the worst affected category as a large percentage of this population has stretched itself to invest in property. As a result, even a marginal increase in the EMI affects this community significantly and hence can have a bearing on the demand and supply scenario in the property sector.

At the top of the pyramid is the premium category of buyers who are not entirely dependent on home loans but at the same time any change in the mood in the property environment can change the equations drastically. In addition, the changes in other investment segments too can affect the fortunes of this segment.

A classic example is the stock market. During the last four years, a booming stock market helped investors to book profits from equity and plough them into real estate. Now, the scene is different both in equity and property markets.

While the stock market has slipped into the red and continues to be less promising in the near term, the property sector is on the verge of a slow-down and prices have already corrected by 25-30 per cent in many pockets of the urban market and according to many experts, the correction is far from over.

In this background, one has to wait and see what would be the role of home loans in reviving the property sector. Can we expect a soft interest rate scenario considering that even the FM and the Government are keen on the same or will home loan rates stagnate since banks have cut their rates just a couple of months ago?

The question gets more challenging in the light of the Union Budget which has announced goodies for farmers which is ultimately expected to put pressure on the general interest rate. The good news for borrowers is that many expect the home loan rates to soften up though it may not slide down drastically as in the past.

The argument in favour of softer interest rate regime is driven by the Government’s desire to keep the rates low. As a result, one cannot rule out a cut in home loan rates but this could be restricted to loans below Rs. 25 lakh. However, one cannot be ambitious with the rate cut as it may not exceed 50 basis points in the medium term.

At present, the home loan rates have slipped from 11-12 per cent level and are hovering around 10 per cent and in the case of shorter tenures, banks are ready to offer loans in the range of 9.5-10 per cent. Another factor which could drive rate cut could be the growing creation of excesses in the market. Many houses on the outskirts of cities are lying vacant and Bangalore is likely to throw up thousands of them before the end of the current year.

That would put pressure on builders to resort to fresh marketing strategies and one of them could be in the form of cheaper home loans through a tie- up with a bank or financial institution. In fact, lenders too are keen on bigger ticket borrowers as they offer better cross-selling opportunity. And, more importantly, the problem of demand too has been in the case of properties in the price range of Rs. 40-80 lakh.

A senior official of a private bank admits that disbursals have fallen by as much as 50 per cent in this segment in the last six months. He attributes the slow-down to changing scene in the economy, largely in the case of IT and ITES segment.

“A slow-down in the US economy has changed the borrowing appetite of salaried class which is now not willing to take a huge loan commitment for the next 10 years” he says.

The good news for prospective buyers is that even if loan rates don’t fall sharply, it is likely to be compensated by a fall in property prices. Also, the rates are unlikely to climb sharply from the current levels as India cannot afford to have a high interest regime. For the economy to sustain a GDP growth rate of around nine per cent, a buoyant housing economy is a must and that is possible only when interest rates are affordable.

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