Rise in home loan rates slowdown in housing loan disbursal

In the current fiscal year downfall in housing sector is expected between 17 and 20 per cent. There has been rise in the home loan rates which had a sever impact on the housing sector, its growth has fallen to 26.6 per cent in 2006-07 from 29.1 per cent in 2005-06

A study on ‘Impact of rising home loan rates’ was done by the Associated Chambers of Commerce and Industry of India (ASSOCHAM). In its study it pointed out that the real estate market has already seen a drop of 60 per cent in sales.

Its impact could further worsen if reversal in rising interest rates for housing is not addressed urgently.

Before the fiscal year 2005-06, the former three fiscals saw a record year-on-year rise in the housing sector of 49.5 per cent, 73.9 per cent and 48.6 per cent respectively. As no suitable measures have been taken to control the interest rates on housing segment have been affected, by nearly 60 per cent therefore many of home aspirants are staying away from the pre-launch sales.

“The builders usually rely on the advance amount received by way of pre-launch bookings. The money is collected well before starting construction work but loans are becoming costlier as the buyers are not willing to expose themselves to an extended time period. Instead, they wait for the completion of construction. Several developers have, therefore, deferred the launch of their residential projects,” says the study. The study conducted referring to differential between EMIs, says the approximate change in EMI for housing loan of Rs.10 lakh works out to be Rs.3,250 and puts an additional burden of Rs.39,000 per annum on end-users.

The study also points out that speculators play a significant positive and negative role in pushing the prices of property by more than 20 per cent and rise in interest rates helps speculators to dictate the prices.

According to Chamber’s findings, the recent boom in property market joined with low interest rate regime had worked as a breeding ground for speculators. So much so that speculators included a whole range of players such as small property brokers, big or small retail investors apart from big players. The speculators generally buy units in bulk by paying margin money thus creating an artificial shortage, which increases pressure on the prices.

With the funds becoming dearer, there has been a major slowdown in speculated purchasing activities by investors for at least short term. The risk rewarded ratio of the speculators has been thrown out of gear. For the time being the risk has magnified as the buyers are adopting a “wait and watch policy”, with the expectations of correction doing rounds, concludes the Chamber’s assessment. In the last couple of years the real estate sector market size currently estimated at $15 billion which has grown between 35 and 38 per cent in the last couple of years as a result of which huge investments have poured into it.

It is expected that 2008 onwards, the real estate sector is likely to grow between 40-45 per cent, but by 2010 metros and large cities will see a slow pace. The study stated as a result of this, the reality sector in tier II and tier III and even tier IV cities will make major expansion drive for providing housing units to the neglected lot of society.