On one hand, the National Housing Bank’s Residex, a property price index, shows that prices in 22 out of 26 cities across the country have seen a downward trend in the April-June period.
On the other, many lending institutions, including HDFC Ltd and ICICI Bank Ltd, have recently increased their benchmark rates by at least 25 basis points or 0.25% point, pushing up home loan rates.
So while property prices are going down, the loans are becoming costlier. A tricky situation for someone planning to buy a residential property at this point.
“Residex is a function of demand and supply of properties whereas for an individual, buying a house depends on her economic condition. So obviously, people are in a fix,” said Ranjeet S Mudholkar, vice-chairman and chief executive officer, Financial Planning Standards Board India.
The current scenario
Real estate developers are feeling the pinch of a gloomy economy. “Though the fundamentals of demand—young population and urbanisation—are intact, only those with genuine and immediate need for a residence are buying property now,” said Brijesh Parnami, chief executive officer (distribution), Destimoney Enterprises Pvt Ltd, a New Delhi-based home loan consulting and real estate advisory firm.
According to him, investor associations that were around in the bull market of early 2000s and used arbitrage—secured loan at 8% and invested in property which appreciated at a much higher rate of at least 12% per annum—to make gains are now sitting on the fence.
Also, people who were investing in their second or third houses are not doing it at present.
This has led to a shortfall in demand and has created an inventory in the real estate market, which in turn has pulled down prices.
Rising lending rates has further added to low demand.
Widening deficits, forthcoming elections and policy hurdles are some of the problems that the economy is facing at present and these factors have led to a dilapidated currency which has lost at least 20% of its value in the last one year.
“There is a lot of cloud regarding these issues and we are facing a lot of challenges on these fronts,” said Parnami. These factors are leading to an increase in interest rates because it seems that the measures taken by the government and the Reserve Bank of India, which were earlier seen as short term in nature, will stay for a while.
What to expect
Though it seems we are at the top of the interest rate cycle, we may actually see some upward movement even from here. “The way things are moving, there is room for uncertainty.
There are many factors such as the food Bill, US policy actions and our internal conflicts that may take the interest rates in any direction,” said Riten Ghosh, general manager, home loans, State Bank of India, India’s largest lender in the country.
Though Ghosh doubted that interest rates will go down immediately, he said a good buying opportunity should not be missed.
We may see further correction in real estate prices.
“It is established that we are in a freefall and in these kind of situations, developers pick up expensive debt to pay for old obligations in an attempt to avoid default,” said Sanjay Dutt, executive managing director, South Asia, Cushman and Wakefield, a real estate consulting firm. He cited similar experiences back in 2009.
In these circumstances, developers welcome equity and venture capital for the first six-seven months but once these dry up, they hit the retail market.
“There could be various schemes that would hit the markets and we expect that to happen in another four months’ time,” said Dutt.
So this could be the phase when end-users will see real correction, which was not visible until now.
What should you do?
The fundamental rule of financial planning says that if you have genuine need and the capacity to pay, then it is always the right time to buy your first property, in which you will presumably live. “If the property deal is good, buy it. If one is a genuine buyer, she should take advantage of low cost,” said Parnami.
There is another way to look at it. Say, the price of the property you want to buy has corrected by Rs. 5 lakh and the rise in interest rate will require you to pay the same amount over a tenor of 10 years.
Even in this situation, you are better off because you will not be paying the money upfront. Also, given that we may be at the top of the interest cycle, the rates may go down from here. Go for a floating rate as chances are that your interest outgo will come down soon.
If you are not buying for own use then compare returns on investment with other asset classes. “Factor in rent and other factors and then see if you are still getting better returns,” said Mudholkar.
However, if you do not have enough money to make a large down payment or you do not have a pressing need to buy a house, you should wait for the home prices to correct further and interest rates to stabilise or come down.