In your interest.
Online Personal Finance Magazine
No beating about the bush.
What has changed? Rising interest rates have been one of the prime factors negatively impacting the real estate sector. Sales have reportedly declined up to 70% in several markets and prices up to 20% in places like Gurgaon, Greater Noida, Ghaziabad and Kundli in the national capital region as well as in some Mumbai suburbs. Gagan Banga of Indiabulls, was recently quoted as saying, “Interest rate hike has dampened the sentiment in the real estate market, which will result in further slowdown. We see 5%-15% price correction in the real estate sector in the next few months, depending on the project and its location.” It is not just the real estate developers who are voicing concerns of a price correction. Keki Mistry, vice chairman of HDFC, told the media, he feels that prices across India may drop by as much as 15% in the coming months. Demand for loans, especially for housing, is likely to drop drastically, thanks to the central bank’s decision to hike interest rates in the face of a grim macro-economic situation.
Prices of houses in some parts of Mumbai and New Delhi had more than doubled over the past two years making Mumbai the third most expensive location for rentals in Asia (and sixth worldwide), according to Knight Frank and ECA International’s accommodation survey done in April this year. Interest rates have been rising gradually through the past couple of years and the recent rate hike by the Reserve Bank of India (RBI) in the cash reserve ratio (CRR) as well as the repo rate by a steep 50 basis points to rein in prices and keep inflation under control is likely to discourage new borrowers from going ahead with planned purchases hitting the real estate market even further.
This is as far as new borrowers are concerned. The scene is not all that good for even those with an existing mortgage. Existing borrowers of home loans with floating rates are likely to live with extended tenures or higher instalments. Moreover, the hike in repo rates is likely to suck out almost Rs20,000 crore from the banking system affecting credit supply. This is likely to put a brake on the speed at which banks have been lending to borrowers in these segments. Bankers have reportedly decided on a rate hike ranging from 50–100 basis points. PNB is likely to hike its prime lending rate by 50 basis points while the State Bank of India, the country’s largest bank, had hitherto refrained from raising rates but may not be able to hold them back for a long time. All this is likely to adversely affect the real estate sector which is already reeling under the pressure of price correction. Bankers are unanimous about the negative effect that the recent rate hikes are likely to have on the real estate market.