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Looking up? The loan exemption for farmers are ultimately expected to put pressure on the general interest rate, including that of home loans.

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 estimated in the range below Rs. 25 lakh where the buyer predominantly relies on home loans and ends up borrowing as much as Rs. 18 lakh to Rs. 20 lakh.

This category is defined as the priority segment in banking circles, and the government 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 the middle- and upper-middle-income group and has the potential to borrow between Rs. 25 lakh and Rs. 75 lakh. In the past few months of property correction, this has been 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 equated monthly instalment 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 mood in the property environment can alter the equations drastically. In addition, the changes in other investment segments can affect the fortunes of this segment.

A classic example is the stock market. During the past 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 the 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 slowdown 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 the role of home loans will be in reviving the property sector. Can we expect a soft interest-rate scenario considering that even the Minister and the Union 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 are 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, though it may not slide down drastically as in the past. The argument in favour of a 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 can 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 can drive a rate cut can be the growing creation of excesses in the market. Many houses on the outskirts of cities are lying vacant.

That will put pressure on builders to resort to fresh marketing strategies, and one of them can be in the form of cheaper home loans through a tie-up with banks or financial institutions. In fact, lenders 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 lakh to Rs. 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 past six months. He attributes the slowdown to the changing scene in the economy, largely in the case of information technology (IT) and IT-enabled-services segment. “A slowdown in the U.S. 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 do not 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 Gross Domestic Product 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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