The Reserve Bank of India has been systematically increasing the home loan burden by hiking the repo rate 12 times in 18 months, affecting the borrowing capacity of buyers, which makes concepts like 'housing for all' a pipe dream

Costlier by the dozen

The Reserve Bank of India has been systematically increasing the home loan burden by hiking the repo rate 12 times in 18 months, affecting the borrowing capacity of buyers, which makes concepts like 'housing for all' a pipe dream

There is a big joke doing the rounds of India's property markets, about how the government is trying to ensure housing for all – by making proper housing unaffordable. Ultimately, home seekers will have to start buying units in slums and given the Maharashtra state government's largesse when it comes to extending the cut off date for providing free housing to them, it's just a matter of waiting it out a few years before properly constructed 225 sq. ft. flats are allotted. It's the new 5 year plan, according to discouraged home seekers who have witnessed home loan rates going up, up and further up thanks to the Repo rate being hiked 12 times in 18 months by the Reserve Bank of India. Home loans to get more expensive Boman R. Irani, Chairman & Managing Director, Rustomjee, emphasises that "The Reserve Bank of India's move to hike repo rates by 0.25 percentage points to 8.25 percentage, its 12th such hike since March 2010, is expected to make home, auto and other loans more expensive. The Government's commitment to "Homes for All" and "Affordable Housing" has been taking a hit one after the other with these rate hikes. While so far RBI's efforts, consistent with its anti-inflationary stance, have hardly managed to contain inflation, industrial growth and corporate profits have definitely been hit." According to him, the first to feel the impact of the rising rates is the consumer with a home loan who would have to battle higher EMIs, longer loan tenures while dealing with daily inflationary pressures. Impact on purchasing decisions For the consumers planning to make a purchase, the increase will impact purchasing decision. He believes that elongating the loan tenures is something that all banks should consider right now, before passing on the rate hike to consumers. Property developers, on the other hand, will be more impacted as borrowing rates increase with every instance of tightening money supply. "The policy makers and RBI needs to realize that the basic cause of a constantly high inflation is constraints with respect to insufficient infrastructure, shortage of skilled labour, growing problems of land acquisition and less productivity efficiency. These factors are really important for growth and are pulling us down today from both ends leading to less than expected GDP growth and high inflation. And all we see as a stop gap measure is a series of rate hikes to tame inflation." Overall cost implications to consider "The biggest challenge before developers is not just approvals and sale of projects, but to control construction costs that rose by 20-30 per cent in the past one year alone. Rise in prices of steel, cement and other raw materials are putting pressure on the profitability of developers. Between 2009 and 2011, cement costs have gone up 27 per cent per bag, steel 13 per cent and labour almost 50 per cent. The recent developments including a notification to increase the premium on FSI, coupled with continuously rising costs of borrowing have caused a sense of fear and uncertainty among home-seekers and dented the affordability severely, and all concerned, including the government, the industry and the RBI, must chalk out a plan to rejuvenate the development process," Irani feels. Impact on borrowing capacity Manoj John, Vice President Corporate Planning and Strategy, RNA Corp., says, "This is certainly going to make an impact on the home buyers, since it is expected to increase the burden of home loan in view of impending rate hike by the housing finance companies and the banks. The hike, which came for the 12th time in the last 18 months, will have a cumulative impact on borrowing capacity of home-buyers." According to him, RBI's step although criticized in general, is targeted at the rising inflation rate. "Inflation is also adding the input cost for all the sectors including real estate. Therefore, the price of finished product also keeps going up on a regular basis year-on-year in the tune of about 15-20%. As far as the real estate consumer is concerned the pent up demand for housing is increasing; and today the rental market is seeing more activity as the buyer is delaying the purchase decision. The demand-supply gap in entire Mumbai Metropolitan Region is growing continuously with fewer project launches and the prevailing regulatory uncertainties." Rates will see a downturn later Mayur Shah, Managing Director, Marathon Group, points out that "RBI's latest hike certainly is going to make a moderate impact on the overall market sentiments in the real estate sector. However, in general, looking at the huge demand for housing across the country, we don't see a crisis like situation. Our internal customer's survey reveals that 50 per cent of customers seek loans for housing; also average loan to property cost is only 55 per cent." "The home loan is typically for 15-20 years and the current rates are hovering around 10.5-11 per cent unlikely to remain at the same level. The rates are bound to see downturn as soon as inflation comes under control in the near future. Hence, average interest rate on 15 years may not be as high as it is today. In fact, it should come down to 8-9 per cent. Loan rates not a key deciding factor Interestingly, loan rates are not the deciding factor in house purchases. Location and need for home are the deciding factors for buying property. Therefore, rate hike is unlikely to make a major negative impact on home buying. There has been good demand for affordable and mid-luxury residential apartments in the current scenario," Shah adds. Will this be the last hike in 2011? Pradeep Jain, Chairman, CREDAI, said, "This is 12th time in last 18 months that rates have been increased and it is evident to all that it has not been material in taming inflation to a desired level. However, I am confident that this current hike will be the last one for 2011." He opined that while general sentiments in India are that with festive season people tend to go for buying decisions and as far as real estate is concerned we see good buying in the festive season but these rate hikes have made cost of funds expensive for both developers and buyers, and we may not see the buying spree in the coming festive season. As real estate developer, we are not left with any choice but to pass on the same to our buyers resulting increase in property prices. Hereby, we request RBI not to increase the rate to any further extent; instead we appeal to RBI to stimulate measures for an improved supply chain management." Pranab Datta, VC & MD, Knight Frank India, said, "The fallout of the weakening rupee has been the recent petrol price hike. The rising inflation rate thus made a case for further tightening of the key policy rates. Hence, we are witnessing this twelfth repo rate hike since beginning of last year. On one hand this will put a stress on the leveraged balance sheet of the developers and on another it will burden home loan customers who are already troubled with rising household budget. As prospective buyers distance themselves from property, the holding capacity of the developers will be impacted further."