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Demand for home loan to remain soft!

Demand for home loan to remain soft!

Harsh Roongta

24 Mar 2008

To be, or not to be: that is the question. This soliloquy of 'Hamlet' by Shakespeare is aptly defining the dilemma of home buyers today- whether to be a home owner or not. He is finding himself sitting on the fence in a trance like state whether to buy a house or wait..

So what does 2008 has in store for us?

Home loan is the biggest component of the house purchase, any change in this affects the decision. Till recently (2006-07) the exploding property prices and rising interest rates were the major dampeners in the spirit of home buyers. In the last few months banks had reduced the interest rates between 0.5 -0.75 percentage points; still this has not led to the increase in demand for home loans given the exorbitant property costs.

As it is, it has been a quite year as far as property purchase is concerned, particularly the January- March which has been quite low. In this present quarter also we cannot expect real estate market to make much of a headway followed by traditionally slack July- September quarter. Any sign of life will only be felt around the October- December quarter.

Though softening property prices may trigger a few purchases but it actually may give rise to postponement of purchases as consumers expect them to fall further. In such a situation buyers may wait and watch... wait for property prices to fall further and watch at what price they can make the purchase. It is expected that property prices may continue to soften but are unlikely nosedive, they will soften slowly...

Going by this we expect that demand for home loan will be soft because dropping of prices may not finish the correction during this year.

As far as interest rates are concerned, these are not expected to decrease any further but in all likelihood they may increase. We know that interest rates are determined by other factors affecting the greater economy and banks' ability to bring down interest rates on housing loans is not just a function of demand-supply of housing stock.

As more players become active in the run up to the promised banking liberalization in 2009 we should see some more transparency come into the market due to a combination of increased regulation and increased competition. Hopefully we shall see regulation that shall ensure that more transparent basis is used for adjustment in floating rates thus making its movement both ways rather than just one way (upwards as at present). Also we should see the first of the licenses granted to a credit information company (popularly called a credit bureau). This will increase economic incentive to pay your dues on time and penalize people who default on their obligations.

Another factor which will impact property market is introduction of Mortgage guarantee which is finally slated to come to India as Banks as home finance companies would like to get risk cover on home loan defaults. National Housing Bank (NHB) is setting up a mortgage guarantee firm as a joint venture with global financial institutions to provide risk cover to lenders against defaults in housing loans. NHB is in talk with global partners such as International Finance Corp (IFC) and Asian Development Bank (ADB) for the venture.

All in all 2008 is likely to be a wait and watch year as far as residential property and home loan are concerned.


  • Interest Rates unlikely to decrease, may increase

  • Property prices may soften

  • Demand for home loan to be soft

  • Slack period till September 2008

  • Rising inflation to affect interest rates

  • Mortgage guarantee to come in effect