There have been five years of property boom in India. Rising income levels,
changing demographics, cheap mortgages and a robust economic outlook had been
fuelling the demand for housing. However, macro-economic fundamentals have
changed in the past few months and the impact of this on the real estate market
is increasingly becoming evident as we head towards more economic problems at
least in the medium term.
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.