For the residential housing sector, last week’s announcements by Prime Minister Narendra Modi and the subsequent rate cut by the banks and housing finance companies herald fresh hopes of an uptick. For an extended period of time, the sector has suffered from issues that include high pricing of residential units, soaring interest rates in the banking sector along with the broader issue of developers losing customers trust due to delayed delivery of projects.
Even as the home loan interest rates have now come down to levels of 8.6-8.75 per cent after the recent reduction in rates by banks and housing finance companies by around 60 to 90 basis points (bps) and are significantly down from the level of around 10.5 per cent two years back, experts feel that interest rate is only one of the factors that may help revive the demand in the sector. For the housing sector to really witness any tangible return of demand, there has to be a change in buyers’ sentiment, which is mostly linked to the broader economic growth, performance of companies across sectors and the rebound in consumption.
“Rate cut and subvention schemes can give sentimental boost to the demand. But, if the prices are high and the home buyers does not have confidence that the developer will deliver the project in the promised time, it won’t lead to much rise in demand,” said DK Pant, chief economist, India Ratings. He added that there is trust deficit in the market as homebuyers can’t take the developers promise on delivery of project as there have been delays by several years in the past. “This leads to a situation where the customer has to bear the cost of both the rent and the EMI (equated-monthly instalment), which is not a healthy development for the market,” he said.
Some economists also feel that the broader housing demand is also linked to the overall revival in the economy and the sentiment on job stability and growth. “That is very important for pick-up in housing demand. Unfortunately, the infrastructure sector is not in good shape and even the manufacturing sector is not doing well. We have to see stability coming back across sectors before one can visualise growth. That will bring demand for housing sector,” said an economist who did not wish to be named.
Samantak Das, chief economist with Knight Frank, feels that affordability of housing is a big issue in the market. While the decline in interest rates have managed to improve the affordability of the housing units for customers, he said that the main cost is the cost of the house and that has to come in the range of the customer. He, however, pointed that it has improved to an extent. “There have been some price and time correction in the market but more is required. While our benchmark for housing price-to-income ratio is 4.5, this still remains high for most of the cities and, thus, is still out of reach of homebuyers,” said Das. This essentially means that if an individual is earning Rs 10 lakh in a year, he can buy a house of around Rs 45 lakh.
Citing example for Mumbai and Delhi, he added that while the housing price-to-income ratio for Mumbai had hit a high of 11 three years back, it has now come down to 8.5 but still continues to remain very high. Similarly for the NCR region, Das said that while the ratio had reached a high of 8 two to three years back, it has come down to 5.5. “The affordability has improved but the prices still remain high.”
The sharp correction in interest rates announced by the banks and housing finance companies over the last few days are set to increase the affordability of homebuyers. During the week, banks and housing finance companies announced to bring their interest rates down from around 9.2 per cent to around 8.6 per cent. So, in the last two years, it has fallen by around 200 bps, bringing the EMI expense down significantly. For example, if the EMI on a Rs 50 lakh home loan for 20 years amounted to Rs 49,918 at 10.5 per cent interest rate, it will now be 44,026 at 8.7 per cent. This is significant saving for a homebuyer.
“Home loan rates are now at their lowest in six years and tremendously improves buyers’ affordability. The cut in rates; the recently announced enhancement in Pradhan Mantri Awas Yojana subsidies; and tax deductions against home loan repayments, make the EMI cheque smaller than the rent cheque for buyers of affordable houses for the first time in more than a decade,” said Gagan Banga, vice chairman and managing director of Indiabulls Housing Finance.