DREAM HOMES - `Housing for all' takes wings
The country's largest bank, State Bank of India, has already cut the rate of interest on fixed deposits--bulk amounts of more than Rs 1 crore--bringing them down to between 3.75% and 4%, for less than one year, and 4.25%, for more than one year.
Financial experts and other professionals say that home loan rates are likely to follow suit and fall to around 7%, from the current rates of 9.259.50%.
Developers and property consultants say that as interest rates fall due to rise in bank deposits, following the demonetisation of high denomination notes by the government, the affordability of homebuy ers would improve substantially.
Getamber Anand, president of the Confederation of Real Estate Developers' Associations of India (Credai), said that there is a good demand for housings in the affordable segments--up to Rs 50 lakh in metro cities like the NCR and Mumbai. “As the government gives a subvention of 1% in interest on loans of up to Rs 35 lakh, for the purchase of houses in the affordable segment, the net effective rate of interest for buyers will come down to 6% only,“ Anand said.
In that case, as shown in the chart (left), the EMI on a loan of Rs 35 lakh for 20 years will come down to around Rs 23,000, from Rs 30,375, at the current rate of 8.5%, after adjusting for the subvention of one percentage point. The consequent fall of EMI by over 17% will make the purchase of a house possible for a larger segment of the working class.
Anand said this would improve afford ability of the salaried middle-class people, who are the main buyers in the primary market, where they buy it directly from the developers and not in the secondary sale from existing owners of flats.
Anand says these buyers don't have unaccounted money, so they would not be affected by the current demonetization drive while, on the other hand, the fall in interest rates would only improve their affordability.In the secondary market, a customer buys a flat from existing owner on whose name the property is registered.
Real estate professionals say that the drive of demonetization by Prime Minister Narendra Modi would, in fact, help the real estate sector and the economy as a whole.
Brotin Banerjee, MD and CEO of Tata Housing Development Company Ltd, allaying apprehension of any negative impact of the move on real estate sector, said: “There has been unwarranted fearmongering with regard to the impact of the demonetization high denomination currency on the real estate industry. One can understand that a certain segment will feel the pinch--but the greater impact of this will be the fillip to the aspirations of millions of citizens who, firstly, have a fierce desire to buy their first home and, secondly, repose utmost faith in real estate as an asset class. Even before this announcement, the primary housing market was driven by easy access to home loans.The housing credit market has been growing at a CAGR of nearly 19%. Now, the November 8 announcement by the PM has come as an elixir for customers; at the same time, the organized real estate sector will be in a better position to deliver. More money will be brought into the banking system, while excess liquidity in the market will be normalized having a deflationary impact.The RBI, which had to keep interest rates high all these years, will now have the leg room to bring rates down.“
Sachin Sandhir, global managing director (emerging business) of RICS, a consultancy firm, said that the cleansing of the market may result in the rise in the absolute price of property. But, for buyers, as the interest rates would also fall, the impact would be positive, Sandhir says.
“Traditionally, the preponderance of `black' or unaccounted monies in real estate--largely by way of cash transactions--is seen more in secondary market transactions and supply chains related to primary markets, like land, material, labour, etc. Secondary markets would be affected by demonetization, as unaccounted cash pay ment will no longer take place. This will result in some dip in the sale of assets that are sold or purchased in the short term. However, in time, it will not be surprising to see prices go up, as sellers come to terms with the fact that capital gains tax has to be paid on monies. Sellers are likely to factor that liability into the sale price,“ Sandhir said.
He further argued that prices in the primary market would also go up. “A closer look at the primary market will show that there are several components of informality within the production chain, like purchase of land for onward development of a project.Before the demonetization drive, a landowner could enter into an agreement with a developer where part of the consideration paid would be unaccounted. Now, with the landowner no longer able do that, he would either sit out on the land, stalling the entire project, or charge a higher premium to maintain the same cash margins after tax.The same principle also works between developers, contractors, and sub-contractors.All of this included, the input costs of developers would go up and, the only way they can respond would be by raising prices, which could affect a market already strained,“ Sandhir said.
Manoj Gaur, managing director of Gaursons India Ltd, concurs with the opinion of Sachin Sandhir, saying that buyers have great opportunity to buy in existing projects, at current prices. “Current prices of real estate are not going to go down again in the future. The fall in home loan rates will drive demand, which will firm up prices of the real estate too,“ Gaur says.
Navin Raheja, former chairman of Naredco and CMD of Raheja Group, said that customers should not wait for dip in interest rates to buy. “At present, when prices are rock bottom, customers can take loans at variable rates and take the plunge. The benefits of rate cut will come to them automatically when banks cut interest rates. Also, when interest rate fall, real estate prices will firm up,“ Raheja said.
Abhishek Lodha, managing director of Lodha Group [the firm joined hands with Trump Organisation, owned by the US president-elect, Donald Trump, to construct a super-premium residential project in Mumbai], said: “The Prime Minister has gone for demonetization with the clear intent of increasing the economic strength of all law abiding citizens, especially the middle-class and the poor. The demonetization drive will push banks to cut lending rates significantly, triggering a revival in economic activity across the country.
This will subsequently improve liquidity and lower interest rates by 1-1.5%, in the next 12 months. With this, EMIs will also reduce by almost 12%, which is a pointer to customers to buy soon before demand and prices move up. All these factors will boost the ability of customers to buy homes, giving impetus to demand and the overall economic growth.“
“More importantly, in the long run, pro fessional-managed and well-organized companies in the real estate sector will significantly benefit from this move and the scourge of black money and corruption will eventually vanish from the sector. This is a win-win situation for both consumers and investors, as transparency will increase and risks will reduce substantially, over the next 6-12 months,'' Lodha said.
“RERA and demonetization are very positive and forward-looking milestones for the real estate sector, as these will bring more transparency in all real estate transactions and push for greater financial inclusion in the economy, respectively,“ Gautam Thapar, director of Thapar Builders, said.