Will home loan rates rise?

POLICY IMPACT

According to the monetary policy that was announced in the last week of July 2010, the key changes include:

Repo rate raised by 25 bps to 5.75%, while the reverse repo raised by 50 bps to 4.50% with immediate effect.

Cash reserve ratio (CRR) kept unchanged at 6%
The money supply projection for FY11 retained at 17%

Aggregate deposits growth projection and non-food credit retained at 18% and 20% respectively.

Apprehensive

The Reserve Bank of India’s recent move to increase repo and reverse repo rates has stirred apprehension in the real estate sector. The general perception is that as a consequence of this initiative, the home loan rates would also increase, possibly impacting the demand for housing sector. Says Shobhit Agarwal, Director, Protiviti Consulting Pvt. Ltd, “with cost of borrowing going up, it would dampen demand. Further, as borrowed funds become dearer, demand for fresh funding may also reduce which has a negative impact on pace of new developments thereby constricting supply.”
Vineet Singh, Business Head, 99acres.com has an alternate take. “The increase in the rates were as expected. Given the demand-side inflationary pressures in the recent times, it had become imperative for the RBI to take up such monetary measures. Most key players in the realty industry would agree that such a step was required to curb inflation and in the long run, would perhaps benefit the industry as well. Also, the CRR not changing means that the volume of liquidity would remain favourable.”
 
In case of more hikes...

The hike has come at a time when the realty sector has just about managed to consolidate with positive signs of growth, after going through a dodgy phase with last year’s recession. In case of further hikes, the lending to real estate companies would happen at even higher rates.

This could negatively impact the growth of the real estate industry. The real estate sector is as it is experiencing paucity of funds. It will help the realty sector only if the current interest rates of home loans are maintained. Agrees C V Lakshmanan, CFO, Inno Group, “as the spreads will come under pressure, banks will be constrained to increase the interest rates on the housing loans too. Even though the demand has started moving up in the housing sector, the rise in interest rates may act as a dampener for decision making.”

Again, the impact of the reverse repo rate really kicks in only if banks are surplus in liquidity.

“With the increase in the reverse repo rate, the banks’ expectation of minimum yield increases on that asset class. However, because the current construction finance rate already covers that minimum rate of return, we don’t expect construction lending rates to increase immediately. Similarly, the increase in repo rate has already been overlooked by leading financing institutions signalling no change in the home loan lending rate in the short term. However, with the GDP poised to grow between 8 and 8.5% and there being a need to control inflation, it is expected that the interest rates would be hiked again. It is expected that these rates will continue to move up for the rest of this fiscal which would mean that the realty sector will face increasing home loan and construction finance rates even if commercial banks decide not to affect a rate increase at this point. With the growth momentum building up again in the sector, I expect the industry to be able to take this in its stride,” says Om Chaudhry, CEO, FIRE Capital Fund.

“Most consumers of real assets would not be carried with a 25 bps increase as yet but they may turn their backs in the long term if rate rise continues. The impact on real estate sector can be discussed in two ways i.e. commercial and retail. In both the cases, an increase in the interest rates would mean an inevitable pushing back in real asset buying decisions both for consumption and investment. The rate rise will bring in additional interest outgo burden which would dent both the end user and the supplier,” says Bhuvan Yadav, real estate analyst, Karvy Stock Broking Ltd.

Agrees Samson Arthur, Country Head - Quinn India, “if the rates are further revised on the higher side, continuing the trend (the recent one being fourth one in this year) by RBI to control inflation (India’s inflation is now the highest among G-20 economic powers) then, it would certainly impact the decision of many who intend to invest in real estate in future.”

Housing loans costlier?

The RBI has announced raising the repo rate which will raise the cost of borrowing, therefore interest rates are expected to go up for both corporates and individuals.
Though increase is marginal, raising borrowing costs always has some negative impact on demand - how much is obviously dependant on various factors. “Home loan rates in India are already riding high and are higher than other countries. Therefore, there is no scope for commercial banks to increase home loan rates any further, according to me. The rate hike is only marginal, of course this is the fourth consecutive raise. The raise is largely targeted on containing inflation. 

“This rate hike may help to moderate inflation- given a situation of likely good monsoon as rightly observed by RBI governor and also stable global commodity prices in recent times. There is a general apprehension that this fourth consecutive hike may translate into hike in bank lending rates. However we have to wait and watch how commercial banks may react-as they may be raising their deposit rates alongside - obviously this will have an impact on their spread/ cost of funds,” says M Murali, Managing Director, Shriram Properties Ltd.

Opines Chandrashekar Hariharan, CEO and Founder BCIL ZED World, “in an environment of healthy and rising growth in the economy, investors and home buyers will remain optimistic and willing to absorb the incremental rise in borrowing costs. The RBI has to look at other instruments for deterring price rise. Embarking on such deterrents for one sector alone, will not bring the necessary slowdown in price spiral.”

More residential demand?

The residential demand is on the rise in the last few months and the demand will continue to grow due to the launch of affordable housing segment by lot of developers.
“The expected rate hike of up to 50 basis points by the banks in the near term is not expected to impact the housing loan demand in the near term. However, banks will probably discontinue the teaser home loan rates which were offered by them during the past few months,” feels Ravindra Pai, MD, Century Real Estate.

In case of housing loan rates, banks have suggested that in the light of current policy changes, housing loan rates are likely to remain stable. However, there could be an increase in housing loan rates in the future.

“Accordingly the borrowing cost of the real estate developers is expected to increase in the near future. Given that most of the developers have restructured their loans and would be already paying higher interest, the increase in rates could have a significant impact. In case of restructured debt where the developers are under the moratorium period, there might be some lag before the real impact is felt.  The expectation of an increase in home loan interest rates might result in an immediate spurt in demand, as customers would like to close transactions before the withdrawal of teaser rates. 
However in the long term, the rate increase would clearly impact the overall affordability,” says Amit Mookim, Director - Strategic and Commercial Intelligence, KPMG.

Adds Sunil Jindal, CFO, BPTP Limited, “The realty sector is apprehensive on two points: the likely increase of interest rates in the near future for lending by banks and the likely increase in rate of interest for housing loans, which will have a cascading effect on the demand for the housing sector.”