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Demand yet to pick up but future looks good!

The onset of year 2009 has brought in some good news for those who are dreaming of a 'home' with home loan rates as well as property rates spiraling downwards.

Harsh Roongta

27 Jan 2009

The onset of year 2009 has brought in some good news for those who are dreaming of a 'home' with home loan rates as well as property rates spiraling downwards.

It is expected that further correction in the property prices will happen in the second and third quarter of the year; still these efforts have created some ripples in the property market. Though home seekers have started looking for properties, still mood is not that upbeat owing to low buyer sentiment due to uncertain financial outlook for most consumers. 

The considerable reduction in rates is already beginning to affect 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 just for those below Rs. 20 lacs) in this quarter from at least the PSU banks.

Recently announced stimulus package by the Government 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. However it cannot solve the issue of lack of risk appetite in the banks. 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.

Let's analyze this in another way -Loans up to Rs. 20 lakh will mean a cost of up to Rs. 25 lakh (after taking into account the margin money of around Rs. 5 lacs). These kinds of flats are just not available in the metros like Mumbai, Delhi and Bangalore except in the far flung suburbs. 

But, with the current property price correction, the tier II and tier III cities will have such properties available. The significant reduction in interest rates is likely to result in some increase in demand for such properties. Notwithstanding some corrections, property prices in popular areas continue to be unaffordable and we are unlikely to see new demand emerging till the prices reach some kind of equilibrium. So the number of consumers who will take advantage of this package is unlikely to be very high. Only if the property rates drop by between 20-25% in the middle and high-end home segments, one can expect a spurt in the business.
In the meanwhile RBI can make the home loan seeker better equipped by issuing the licenses to Credit Bureaus 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. Also make the necessary operational changes in Section 138 of the Negotiable instruments act to ensure so that people realize the seriousness of issuing cheques and the impact of dishonoring them. Finally, activate the Mortgage guarantee scheme so that the effective down payment can be brought down in a home purchase.

This will raise the customer's confidence leveland this is the need of the hour!

Clearly all things going right we should see a spurt in business in the last quarter of the year which is also traditionally a large demand quarter.