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The writing is on the wall

The onset of year 2009 has brought in some good news for the home loan customers and real estate sector as well.

Harsh Roongta

30 Jan 2009

The onset of year 2009 has brought in some good news for the home loan customers and real estate sector as well.

The government has managed to convince RBI on the merits of reducing interest rates further. With the cut in CRR (the amount of cash that a bank is required to park with RBI for every deposit), Repo rate (the rate at which banks borrow from the RBI) and Reverse Repo rate (the rate at which banks park their funds with RBI). These significant reductions are already beginning to effect deposit rates and will soon lead to a fresh round of rate cuts for both deposits and loans. In fact let me stick my neck out and say that we are likely to see single digit interest rates for regular 20 year home loans (not necessarily only those below Rs. 20 lacs) in this quarter from at least the PSU banks.

The stimulus package however cannot solve the issue of lack of risk appetite in the banks. As we know that banks have parked over Rs. 50,000 crores with the RBI @ 4% under the Reverse Repo window. Clearly the banks want to play safe. On the other hand consumers also await a further reduction in property prices before they will act on the property purchase decision. All that this means is that volumes will remain rather elusive in the residential property market.

The government can these measures to activate the market:

1) Somehow get RBI to issue the licenses to Credit Bureaus under the CICRA so that the consumer's right to his own credit report can be activated. This will have a significantly positive effect on credit sensitivity in the country and bring home to the consumer the benefits of paying their bills on time as well as the cost of not paying them on time.

2) Make the necessary operational changes in Section 138 of the Negotiable instruments act to ensure so that people realise the seriousness of issuing cheques and the impact of dishonouring them.

3) Activate the mortgage guarantee scheme so that the effective down payment can be brought down in a home purchase.

Coming to earlier edition of 'Stimulus Package' announced by the Government in December 2008 and implemented by Public sector banks seems like Santa's gift from heaven that has brought along goody bag (lower interest rates) for number of people. The package entails consumers seeking home loans between Rs. 5 lacs+ upto Rs. 20 lacs a fixed interest rate (for 5 years) of 9.25% and nil processing and pre-payment fees and free life insurance to boot. This may lead to some action in the real estate sector particularly in budget housing segment.

But home buyers with a budget of Rs 30-40 lakh may not like to go ahead with their decision to buy new houses due to concerns about the economic scenario. This means that the volumes will remain rather elusive in the residential property market. The unsecured loan (personal loan) market is more or less dead given the complete lack of risk taking appetite among lenders.

A further reduction of rates can also be expected to be on the cards. Only if property rates drop by between 20-25% in the middle and high-end home segments, one can expect a spurt in the business.

What essentially is expected from the realty sector in 2009 is consolidation. A series of price corrections, revision in rates is finally getting this act together.

So, what is it that can be actually expected? Buyers are going to play the waiting game till get the deal they are all waiting for. However, this is likely to lead to consolidation by the last quarter of 2009.

Developers are likely to bend towards the still nascent concept of 'affordable housing'. In response to the 'demand slowdown', at the cost of low profits, the builders will be offering properties to boost the demand. And, cities will not remain untouched from the phenomena.