Whither interest rates?


Is this the right time to buy your dream home? Should we not wait for the market to bottom out? Wouldn’t interest rates further go down? Should we not wait till the next Budget?

These are some of the questions haunting many a “would be home buyer” even as they brace to determine the ‘bottom’ of the market.

However, every financial wizard would admit to the fact that it is difficult to time the market, and s/he would never be able to ‘catch’ the bottom.

We need to take a call when most conditions necessary for ‘bottoming out’ of the market are fulfilled.

Looking at the following important facts, it can be inferred that the housing real estate is at one of its ‘best – buy’ periods which customers should be able to take advantage of.
The Indian economy is currently in a short term ‘deflation’ mode, with WPI inflation rates hovering around the zero per cent and is expected to increase in the coming months to a healthy four to five per cent.

 This is a leading indicator of interest rates and hence it is indicating that the direction of interest rates in the coming months is going to be northwards.

Alarm bells ringing

SBI Chairman, O P Bhat, has set the alarm bells ringing by stating that he expects interest rates to increase in the next three months by 50 to 100 basis points, so you can expect your home loan EMIs to inch up by a few hundred rupees by Diwali!

Housing affordability as calculated by HDFC is close to its lowest figure in 15 years of 4.3.
The lower the indicator, the more affordable the property is. This again indicates that we are in that phase of the market when residential real estate is at its affordable best.

Prices drop sharply

Real estate prices across markets have witnessed an overall drop of 20-25 per cent and in some cases they are 40-50 per cent below the peak of 2007-08. Further, more and more builders are announcing ‘affordable’ housing schemes popularly called Nano homes across the country, pricing homes at unheard of prices of Rs 5-15 lakhs! 

Special housing loan rates are being offered by most of the nationalised banks and private banks with lower interest rates for the first few years, and then adjusted to the prevailing rates.

The UPA-2’s first budget presented by Pranab Mukherjee, though short on any big bang effect, put forth clear directions for the way forward in terms of the growth trajectory being targeted by the government.

The government expects the GDP growth rate to get back on track along the nine per cent mark by 2010-11.

These estimates have been seconded by reports emerging from the IMF, World Bank, OECD, etc, who are now revising upwards growth targets for the Indian economy in the coming years, dispelling all doubts that India would fall back on its promise of being among the largest economies in the world as well as being the fastest growing one.

‘Green shoots’

There are enough ‘green shoots’ in the economy as suggested by the first round of corporate results for Q1 2009-10, which are mostly better than expected across sectors.
This is borne out by the Sensex and Nifty springing back and recovering most of their lost ground.

The global economy too is seeing a quick recovery, with Asian markets like Singapore rebounding with a 20 per cent GDP growth rate, leading to overall improvement of sentiments and general ‘positivity’ and feeling of well being across various markets around the globe.

Broad indicators

Thus, the broad indicators are suggesting that interest rates are at a low and are expected to move northwards.

Real estate prices are also low and expecting a north bound movement. The general economy’s slip has been arrested and is being put back on the fast growth track, leading to generation of employment and putting more money in hands of the common man. 

Look at the merits

Such a combination of events occur as rarely as any astronomical combination, so investors and the ‘home-buyer’ should look at the merits of this opportunity and decide quickly regarding the purchase of their dream home, availing all the special offers for both property as well as home loans that come along.
So go ahead and book that long cherished home today!
(The author is President & CEO, Real Estate Bank India - REBI)

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