Decisive interest rates reduction by banks was just the spark that the real estate market was waiting for. With home loan interest rates on a downward swing, realtors are cheering the actions of lenders such as State Bank of India, Housing Development Finance Co and ICICI Bank which have shed their reluctance in passing on the Reserve Bank of India’s past rate cuts.
The rate reductions varying between 15 and 35 basis points across the banking industry can fuel the demand which is already being stoked by the government’s programmes such as Smart Cities, Affordable Housing and Digital India with a focus on reducing the inflows into cities which are bursting at the seams. A basis point is 0.01 per centage point.
State Bank of India is now offering home loans at 9.55 per cent, while HDFC, which cut its lending rate on Monday, is offering them at 9.65 per cent a year. Women borrowers get loans at 5 bps lower rate. ICICI Bank also followed its peers and lowered lending rates on Tuesday to 9.65 per cent a year for loans up to Rs 5 crore for salaried professionals; for women borrowers, loans will be 5 bps cheaper.
“This has been the trigger the market was eagerly waiting for. We have already started seeing fresh interest from buyers,” said Sandeep Ahuja, chief executive of Mumbai-based Richa Realtors. “Many realtors in Mumbai have now started rationalizing prices. Companies which understand the right price and right location will see growth momentum.”
Real estate industry has been hobbled for the past few years with poor demand due to unaffordable prices of property which in some cases have climbed 10-fold in a matter of decade. Also, the Reserve Bank of India’s high rate policy to counter inflation prevented buyers. Now, with it cutting policy rates by 50 basis points last month, taking the total to 125 basis points, the market is looking up.
“The various measures taken by the government like Smart City, Digital India, Housing for All along with revival in investment and consumption demand is going to create a favourable platform for the real estate sector to grow rapidly,” said Corporation Bank chairman and managing director S R Bansal.
Prior to this, the mood in the industry was quite despondent. While the sales volume dropped by 19% during H1 2015 compared to H1 2014, new launches fell by a whopping 45% during the same period, real estate consultants Knight Frank said in a report on India real estate covering January to June 2015.
Demand for both office and retail spaces is likely to zoom going forward since an improved economic growth would boost net hiring by IT/ITeS and banking financial services insurance sectors. Prime Minister’s smart city plan is expected contribute to the growth momentum.
Real estate sector contributes 6-7% to GDP and any movement is going to help the entire economy especially the cement, iron and steel sectors and the job market.
The affordable housing segment is also expected to see more traction since the central bank has reduced risk weightage on it, which means lenders would need to keep aside less capital. That improves profitability. India has a 19 million deficit of dwelling units with almost 95% of the gap accounts for the affordable housing space.
“The government’s Housing for All policy and interest subvention scheme are going to create fresh demand. The government has also raised the threshold annual income level for the economy weaker segment and lower income group, making the policy more inclusive,” said Sriram Mahadevan at Mahindra Lifespace Developers.
“The central government and the state governments should now work together to meet the gap. Establishment of mass and rapid transport system would be a key to the growth of the affordable housing segment,” Sriram . Half of India’s population stays out of the cities.
“There has been a long-pending and large demand for housing, given massive the shortage of dwelling units. The lowering of rates would certainly help borrowers get the finance,” said Arun Kaul, who has retired as Uco Bank’s chairman and managing director in August.