Rising interest rates to affect realty prices
Higher interest rates will combine with factors such as temporarily reduced buying power due to stock market fluctuations will reduce demand for high end residences, reports Lalatendu Mishraindia Updated: Apr 04, 2008 23:53 IST
As banks are gearing up to increase interest rates on housing loans, Pune’s Vikas Sharma (25) working with a private insurance company decided to defer his plans to buy a house.
“Now EMI will go up and anyway real estate prices are too high. I will wait till prices come down by 15 to 20% from the current level so that I can buy a house for Rs 30 lakh. Even if interest rates would up, I don’t mind buying at affordable prices,” said Sharma who has been desperately looking for a house in and around Pune over the last six months.
Though Tier II and Tier III markets like Pune are witnessing a spurt in residential construction activity, prices should come down by around 20 per cent within a year according to analysts. In south Mumbai, there is no question of price correction as demand is far in excess of supply but in other markets where infrastructure is a problem, prices should soften.
“More than the rise in interest rates, the ongoing sentiments after the stock market fluctuations will bring down real estate prices. Once sales volumes drop, prices are bound come down since volume is a precursor of pricing,” said Pranay Vakil, regional chairman, Knight Frank group.
However, according to Raminder Grover, CEO, Sandalwood Residential Services, Jones Lang LaSalle Meghraj the current residential real estate market is not defined only by rising interest rates, but also by higher disposable incomes among the buyers.
“The age of those who avail of home loans is decreasing, and the younger generation has greater financial resources to draw on than in previous years. These buyers are not so easily discouraged by the rise of a few interest rate basis points as the previous generations.”
Nevertheless, he said the rise in interest rates would affect the demand for residential space in terms of segments, rather than in overall terms. Higher interest rates will combine with factors such as temporarily reduced buying power due to stock market fluctuations will reduce demand for high end residences and increase demand for affordable housing.
In other words, there will be no decrease in demand for residences, but only a shift in demand from one segment to the other that is from high end to low cost housing.
Noted developer Niranjan Hiranandani does not see any drop in real estate prices in the Mumbai region as the demand is far too high. “Genuine buyers will certainly come even at higher prices as there is demand for housing. The government must increase supply to make housing affordable. At the current high input costs, it is not possible to bring down prices,” Hiranandani said.