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Small towns driving home loan demand

india Updated: Dec 28, 2011 23:41 IST
Sachin Kumar & Sachin Dave
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Home loan demand in India has managed to grow in the last one year despite continuous interest rates hikes by the banks.

Lending by Indian banks to the housing sector increased by 14% to Rs369,900 crore at the end of October 2011 from Rs324,748 crore at the end of 2010. It had risen by 12% in October 2010 over the previous year, according to data from the Reserve Bank of India (RBI).

"The demand for home loans will remain strong going forward as a large number of households in India still does not have their own houses," said Jairam Sridharan, senior vice-president and head consumer lending and payments, Axis Bank. "We are seeing healthy demand from smaller cities."

To control risisng inflation, the RBI has hiked the repo rate 13 times by a cumulative 3.5 percentage points since March 2010, forcing banks to increase lending rates including interest rates on home loans.

According to industry experts, demand from smaller cities is driving home loan growth. "There is a substantial difference between real estate prices in metros and smaller cities," said Anand Narayanan KB, national director with real estate consultancy Knight Frank (India). "But there is more or less a wage parity amongst buyers in metros and smaller cities, so a buyer in tier II and tier III city has more disposable income, and can buy a house easily compared to say someone staying in Mumbai."

Real estate developers who have been facing an inventory pile-up in tier 1 cities have seen their sales volumes go up in tier II and tier III cities. So while the Mumbai Metropolitan Region (MMR) has witnessed around 25-30% fall in sales volumes due to steep prices, smaller cities continue to see sales happening, say analysts.

Big developers such as DLF, Shapoorji Paloonji, Ansal Properties have also forayed into tier II and tier III cities.

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