House mortgages are at the frontline of the Reserve Bank of India’s (RBI) battle to rein in credit growth. Interest rates on these loans are just short of their 1999 peak. And with RBI Governor Y.V. Reddy announcing the latest in a series of short-term interest rate hikes last week, they could just about cross it. HDFC, the country’s largest housing finance company, dropped its rack rate from 13.5 per cent in June 1999 consistently to a low of 9.75 per cent in July 2003. Since then, it has climbed, again consistently, to 12.75 per cent in January. If HDFC passes on the latest increases, we are looking at a 13.5 per cent scenario. Of course, banks and mortgage companies offer discounts up to 3 percentage points off their rack rates to prime customers, yet the effective rate for them today is 11 per cent, and climbing.
The good news is that interest rates on home mortgages are completing an eight-year cycle and could be close to peaking. On its upward leg, between 2003 and 2007, real estate prices have climbed about 250 per cent across the board by some estimates. The 3 percentage point rise in loan rates meanwhile translates into a 40 per cent rise in the effective cost of credit, and it appears to be bearing fruit. Real estate prices in premium markets in Mumbai and Delhi are holding, and have fallen in some pockets. More important, the climbing interest rates seem to have tamed lending. Against estimates that Rs 105,000 crore would be lent to the real estate sector in 2006-07, the industry feels it will disburse not more than Rs 95,000 crore, mainly due to a squeeze in the last quarter.
It is, of course, unfortunate that the middle-class has to face the brunt of the RBI’s attempts to keep the economy from overheating. Finance Minister P. Chidambaram has already budgeted for slowing growth: his expenditure and revenue projections in the Budget for 2006-07 factor it in. Mr Reddy, since this interest rate hike cycle began in 2005, is trying to prick asset price bubbles. Pity that it pinches the common man.