The Reserve Bank of India, in its first Mid-quarter Monetary Policy Review, has hiked interest rates consecutively for the fifth time since mid-March 2010. The real estate industry has shown a mixed response to the hike. This has caused some concern among real estate developers who feel that this hike in rates is bound to result in home loans becoming costlier. But some believe that the present buoyant market conditions will help absorb a small hike, if any, but further hike in rates could be bad.
The repo rate (the rate at which it the RBI lends to banks) has been hiked by 25 basis points to 6 per cent and reverse repo (the rate it pays for the surplus liquidity it accepts from banks) by 50 basis points to 5 per cent. It has maintained the Cash Reserve Ratio (CRR) at 6 per cent. The objective has been to control the inflationary trends.
Reacting to the development, Mr Navin M Raheja, CMD, Raheja Developers, says in a press release that the RBI has taken a tougher than expected stand in its credit policy announcement. The hike in rates would lead to a rise in the cost of funds for banks and eventually would make loans more expensive. This would tighten liquidity and increase cost of loans.
Real estate is an interest rate sensitive sector and repo and reverse repo rate increases will impact the growth of real estate and reduce the demand in the market. Projects will become more expensive and their viability will be impacted. In our opinion, frequent increases in the rates will affect the real estate industry badly as few capital intensive sectors in real estate have not yet recovered fully.
Mr Irfan Razack, Managing Director, Prestige Estates, is optimistic that the market is likely to absorb small changes given the growing salary levels and the buoyancy in the economy. “The best case scenario is to have a low interest regime,” but that is not always possible.
Major Impact Unlikely
Mr M. Murali, Managing Director, Shriram Properties, feels that the hike in rates so far and the possible impact on home loans are not likely to have a major impact on demand under the present conditions. But further hikes could be a dampener, he says. For now the demand in the residential segment is strong with the presence of end-users. Sales volumes have tripled in the last six months and prices that were hit in the slowdown of the last two years have recovered last ground.
The average home loan rates are around 9 per cent, but if the rates were to increase, the largest market segment, those looking for affordable homes, would be the worst hit. Ideally, the banks should support this segment with a special consideration in terms of rates if further hikes are envisaged. Even a half per cent change in home loan rates either way would make a significant difference to this segment in terms of change in EMI payout, he said.
In another press release, Mr Shobhit Agarwal, Joint Managing Director of Capital Markets at Jones Lang LaSalle India International Property Consultants, says borrowing rates will go up for consumers and developers. For the projects that are already priced high, the impact in terms of demand erosion will be higher. But low-ticket sizes in the Rs 25-50 lakh range are not likely to be affected, he says.
End-user demand will remain intact. Investors in residential and commercial premises will find lesser arbitrage opportunities as the cost of funding purchases becomes higher. Banks will revise housing loan rates upwards. As for funding to developers, this will not be seriously compromised apart from the cost of borrowing going up, he says.