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Rate hike brings down housing prices

Real estate prices spiralling downward due to interest hike

Apnaloan.com Research Bureau

10 Aug 2007

New Delhi: Rate hike is not all bad for consumers and there is a positive impact too. Housing prices across the country have gone down by 5 to 10% in the secondary market. However, for new projects, developers and builders have not cut the prices.  

Following RBI's decision to tighten the money supply and increase the benchmark interest rates, banks have increased rates by 0.50 to one percentage point.  

The interest rate in last six months has gone up by around 3%, resulting into substantial increase in EMIs on home loans.  

Increase in the interest rate would slow down construction activities and would lead to increase in prices in medium-term with higher cost of development, CMD of a real estate company said.  

However, for one year developers would not be able to increase prices, if the present condition continues, he added.  

CMD of Parsvnath Developers Pradip jain said most of the projects, which are launched in last one year and nearing completion, are already sold out.  

In other projects, which are recently launched, builders have already sold the portions they intend to sell. The rest of the portions are normally sold as the construction progresses.  

He said government agencies like DDA are responsible for the rise in the prices of real estate. He said in every auction DDA sold its land at higher than the previous auctions. In that situation how could the government think of developers cutting the price of finished products.  

A senior builder said the interest rates hike and creation of fund crunch would force builders to postpone the launch of new projects unless they are sure that there are demands for the units they would launch to construct.  

This, he said, will dwindle the supply, which would push the price in medium to long term. Therefore, he argued the RBI prescription would not be only counterproductive but self defeating also as it would affect the growth.  

Small builders, who do not have enough financial strength, would be forced to launch the projects to raise money to pay for their expenses. However, a senior builder said there are not many such builders there who have land and is forced to launch the projects because of financial crisis.  

The builder said those who have land, would find investors easily. He said still funding is not a problem provided you have land in the Grade A cities like National Capital Region of Delhi, Mumbai and Banglore. Still many real estate funds are waiting to invest in the country.  

But, situation in the secondary market is different. Many investors, who had bought apartments and plots on loan in the hope that they would sell the property in the next one year and make money, find themselves in dire strait. With the increase in the interest rate, they find it difficult to service the loan.  

A senior of Sahara group, which is developing projects in Lucknow, Gurgaon and other cities, said prices are likely to ease up as a result of home loan rate hike particularly in those places where there was an artificial hike brought about by factors other than those governing actual end users.  

MD of Eldeco Group Pankaj Bajaj said only short term investors will loose money even at the present level. He said if the economy continues to grow at around 8%, investment in real estate for medium to long term would give handsome return.

(Courtesy: TOI) 


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