Wait-and-watch policy for developers

With the recent hike in home loan interest rates, property seekers may soon have a reason to smile, says Syed Amir Ali Hashmi.

india Updated: Apr 20, 2007 17:37 IST

The much-awaited correction in real estate is around the corner. Thanks to the Reserve Bank of India’s (RBI) regulation of a hike in interest rates, the ultimate result is going to be a ‘popular’ effect on ‘overly-high’ real estate prices.

Though developers are still not willing to accept the reality and are hoping that the effect will be ‘short-term’, the middle-class need not feel that their dreams of owning a house have been deferred.

RBI had several reasons for stepping in to save home-seekers. Analysts believe that RBI’s step should significantly arrest the builder-developer-speculator nexus. Yet, there are those who continue to live in denial and claim that home prices will not dip. One section of developers says they are ‘shocked’.

Most of the ones affected are small time operators, while the biggies have realised the possible after-effects of the regulation and are gearing to manage the fallout.

The first and foremost consequence is that speculators have been pushed on their back-foot. “The purpose is to discourage speculative investors because, it will become difficult for them to service large holdings at a time when market prices are not rising.

Speculative capital gains will not be sufficient to cover interest costs. For genuine buyers, for self-use, the rate hike will not have a large bearing because the demand is need-driven and there are tax breaks for the interest paid. From the investor’s point of view, those looking for safety rather than RoR (Rate of Return), will find that this is a good opportunity. But investors seeking overnight gains will be discouraged,” says Navin M. Raheja, Managing Director, Raheja Developers Pvt. Ltd.

Suryavir Singh, spokesperson, Sahara Infrastructure and Housing (SIH), says, “The primary demand for houses meant for end-users will not get affected on account of a hike in interest rates. However, demand governed by investors, brokers etc., will see a downward trend. Thus, real estate prices are likely to ease up as a result of the home-loan rate hike, particularly in places where there was an artificial hike brought about by factors other than those governing actual end users.”

Even in correction, the reduction will not be uniform or standardised. It will vary from property to property. If a property is located in a place with ample infrastructure or expected to have sufficient infrastructure in the near future, then the correction will be marginal. The rest may see a higher reduction. So, value proposition will also decide the correction in prices.

The RBI is also concerned about curbing inflation. Reducing liquidity levels from the system is one way of attempting this. Increased interest rates will curb demand for credit by making buying a more expensive proposition and thereby liquidity will get curbed.

The CRR (Cash Reserve Ratio) has also been increased. “Because of a false hike in the real estate sector, people were not investing money in fixed deposits because the rate of return was higher in real estate. As a result, the government’s reserves dwindled.

Now with the hike in interest rates, people will start moving towards fixed deposits again,” says Abdul Bari, Vice President (Sales and marketing), Majestic Properties. Bari feels that the 1989 scenario may return, when the home loan rates were around 17-18 per cent. “This year we are going to see some more interest rate hikes. This is the only way we can get rid of speculators and rope in end-users,” he says.

Affordability is the main concern for the middle class. With the drop in interest rates, home loans were easy to avail of and realtors took advantage by quoting higher prices and targeting only the high-end segment. Now even banks are following strict guidelines in granting loans at such high rates.

A bank’s main concern is that not many people can afford to pay an EMI of Rs 35-40,000. “Obviously, now we are becoming strict in our guidelines. Earlier, we used to grant loans even on second and third property. But we are now not giving loans like that. On top of it we have to check our defaulter count too,” says a banker.

The only way that developers can still earn handsome revenues is to reduce prices. “I can easily predict that in the next one year we are going to witness around 20-25 per cent reduction in housing prices. We are going to see houses constructed on less area. Developers have to adjust the cost somewhere and provide houses for the middle class, which are in the range of Rs 25-30 lakh,” says Bari.

So one consequence of rising interest rates will be the size of the flats. Developers may have to resize an apartment’s area to ensure that the cost is not beyond the reach of an aspirant. They can also re-work EMIs in favour of buyers so that buyers can fulfill their dreams of owning a house.

The hike will bring stability to the sector. As buyers have to pay high EMIs they will now rely on known names. The effect will be similar to the mobile telephony sector when everyone jumped in the fray and only the big ones survived. “Soon we will be witnessing mergers and acquisitions. Small developers and many fly-by-night operators will pack their bags, and big and trusted names will rule the roost,” says HS Bharana, Chairman, Era Group of Companies.

Analysts are clear that this is the time to wait and watch for those in rented accommodations. If you are paying a rent of Rs 6,000 and plan to get a loan of around Rs 20 lakh, it will be prudent to wait and watch before buying a house.

Investors with deep pockets can wait for a longer period, but many would be forced to start reducing prices. That’s a positive correction then.

First Published: Apr 20, 2007 17:01 IST