Declining Home Loan Rates to
Kick-start Residential Revival
by Mr. Ramesh Nair, COO – Business &
International Director, JLL India
In the midst of all the
demonetization brouhaha, there is reason to celebrate in the real estate
sector. The Indian housing markets historically kicked off due to the easy
availability of cheap home loans. Today, we see the past revisited, with the
possibility of a healthy resurgence in demand driven by dipping home loan
rates.
Cheap loan rates are
obviously not the only factor driving home purchasing sentiment. However, it is
definitely one of the key factors for a family – especially when it comes to
buying their first home.
Home loan interest rates becomes even more relevant
for the value or budget home buyer, as every rupee reduction in EMI can propel
a purchase decision forward.
And needless to add, it is this customer base that
is most vital for the Indian real estate market, as stable residential markets
essentially depend upon healthy end-user demand from middle income and lower
middle income buyers.
Though it has contracted
demand in the short term, the recent demonetization drive will play the role of
a catalyst in this demand revival. Banks are flush with funds post
demonetization, and the potential for countering monetary contraction following
the demonetization drive with affordable loans for the middle class home buyer
is expected to bear fruit soon. With lowering rates, the consumption-led growth
story will continue.
Fence-sitters who have
harboured the desire to own a home but kept waiting for the rates to correct
could not have hoped for a better new year gift as on 1st January 2017, State
Bank of India (SBI) announced its decision to reduce one-year marginal cost of
lending rate (MCLR) to 8% from 8.9%.
A home loan of INR 75 lakh, which was
earlier available at 9.1%, is now available at 8.6%. SBI slashed interest rates
to the lowest in the decade, forcing rivals to follow suit in the fight for
market share. Several other banks such as Union Bank of India, IDBI Bank,
Punjab National Bank, etc. have subsequently reduced their home loan rates.
This steep cut was
facilitated by a surge in deposits during the demonetization period, which led
to a substantial fall in the cost of funds for lenders. Banks have mobilized an
estimated INR 14.9 lakh crore deposits following demonetization. Prime Minister
Narendra Modi had conveyed to all banks that they need to take advantage of the
flood of money received in the form of deposits after the demonetization of INR
500 and INR 1,000 notes.
The deadline fixed for deposits of devalued notes was
December 30, 2016. In the history of the banking system, banks have never
received such a large amount of money in such a short time span.
For aspiring home
buyers, this is the best time in over six years to buy a house. The last time
home loan rates were lower than this was in 2006-08, when rates had slumped to
7.75%.
Besides fall in interest rates as per the government’s existing
credit-linked subsidy scheme, economically weaker sections (EWS) and low income
groups (LIG) seeking housing loans are eligible for an interest subsidy at the
rate of 6.5% for a tenure of 15 years or during the tenure of loan, whichever
is lower on the initial INR 6 lakh.\
While the rate cut will
give the required boost to the residential real estate sector, we may witness
further cuts down the line as cash-flushed banks now share the responsibility of
propping up demand.
Significantly, home loan
borrowers may not be the only ones with a reason to smile – banks will reduce
the lending rate for developers as well. This will bring massive relief to
builders, many of whom are already under a huge debt burden and have not been
able to raise prices over the last 2 years for a variety of reasons.
We see the stage set for
cheer in the residential real estate markets in 2017, for home buyers as well
as developers, despite the doom-and-gloom predictions of naysayers.
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