Stimulus package raises hopes in realty sector
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Will the recent cut in home loan interest rates and associated measures give a boost to the realty sector? K.A. MARTIN finds out what impact these measures may have on the property market.
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Shot in the arm: Will the interest rate cut lessen the burden significantly for borrowers?
The global financial meltdown following the US sub-prime crisis, all of about two years in the making, has caught up with India. Builders admit to a drop in sales. Buyers appear to be more cautious than ever. The money market squeeze is apparent.
To induce more confidence and present a booster dose of faith in the market, the Union Finance Ministry and the Reserve Bank of India operate in tandem. The Union government and its agencies have acted in the conviction that a revival of infrastructure building will circulate more money and bolster the system enough to prevent job-cuts and create employment opportunities.
Agriculture and infrastructure development sectors have come in for special treatment. One of the latest measures has been to cut the interest rates on housing loans.
Last Monday, public sector banks declared that loans up to Rs.5 lakh would invite an interest rate of 8.5 per cent only and those between Rs.5 lakh and Rs.20 lakh, 9.25 per cent, way below the previous level of 11 per cent or more.
The banks announced that they would not charge any processing fees or impose pre-payment charges for loans up to Rs.20 lakh. Free insurance cover has been added to the attractions of these loans.
These measures will help the lower middle class home-buyers. But they may not be good enough to bring about a major change in the current real estate development scenario, feels V.A. Joseph, Chairman and Chief Executive Officer of the Thrissur-based South Indian Bank.
He bases his opinion on the fact that the slackening demand in the housing sector has come after a prolonged price spiral.
The house one can buy with a loan of Rs.20 lakh is smaller now. A two-bedroom apartment will cost upwards of Rs.20 lakh.
Dr. Joseph is, however, convinced that the easing of the interest rates on lower loan amounts is a great relief and the right start to the revival measures.
The builders feel that the easing of interest rates on loans at higher levels can be a good step. George E. George, chairman of Kerala Builders’ Forum, feels that the interest rate can be cut for loans up to Rs.30 lakh.
He feels that prices are not going to fall with the deceleration in the market.
Dr. Joseph says that a lower interest rate also means that there will be fresh bouts of activities at the lower level, creating employment and driving up demand for inputs such as steel and cement.
Tough year
The interest rates have come down at the end of year, the better part of which saw their shooting up, rising cost of living with inflation in double digits and uncertainties in the job market. These factors prevented even small-home-buyers from taking a decision on investments. The interest rate cut is the right beginning, he adds.
A. Pitchaiah, Senior Manager, CanFin Homes Ltd., says that the government can take a second look at the income-tax incentives being given on home loan repayments.
At present, an amount of up to Rs.1.5 lakh paid towards interest is deducted from the total income for tax calculations in a financial year under Section 24(2). Principal payment is being considered under Section 80(c), along with other investments such as Provident Fund contribution, insurance premium payment and so on.
Mr. Pitchaiah feels that under the current circumstances, borrowers can be encouraged to pay in excess of their equated monthly instalments with tax incentives. This will be a great help to them and the banks.
The latter will see a higher cash inflow at a time when they are forced to mobilise funds at higher costs.
The builders, meanwhile, keep their fingers crossed. Drop in sales by 30 per cent and no new projects over the last six months mean that the global meltdown is at the doorsteps.
But the stocks available are relatively low and they can be liquidated in about six months to one year, Mr. George says.
The builders’ forum is going ahead with the Kerala Property Expo, an annual feature in the city, aimed both at non-resident
Keralites and the local buyers.
The exhibition will provide market information and help to gauge the mood of the buyers, the builders feel.
Fewer speculators
The situation in the Kerala market is not serious enough to derail the building industry.
There is hardly any speculation here, says Abdul Azis, chief executive officer of Skyline Builders and treasurer of the Confederation of Real Estate Developers’ Associations of India (Credai).
He feels that metros such as Mumbai and Bangalore have a lot of speculators. Those in the high income groups have been taking loans to buy up property with the hope of price appreciation. The general market deceleration has landed these speculators in trouble, whereas in Kerala, the market is genuine. Here, the end user is prominent.
This is one of the reasons for the forum to believe that the exhibition will be a draw as would-be buyers will like to feel the market pulse.
The builders have pitched for the fact that real property value has appreciated consistently in Kerala over the last decade. They believe this will continue despite the current setback.
The major advantage, says Mr. George, is that the builders have acted sensibly by providing quality stuff and sticking to a price.
In an industry which operates on a margin of around 10 per cent, cutting prices will be difficult. If prices are slashed and property is sold below par, it indicates distress. So far, it has not happened in Kerala. M.V. Antony, secretary of the forum, echoes the optimism. The current phase is one of correction. It is still safe to invest, he says.
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