In a real estate market that has become among Asia’s most sought after, a 300% explosion in home prices in India’s top cities in as little as three years has created a new generation of homeowners. The growth, riding a boom in the economy, has also come with rising inflation that the country’s central bank has tried to curb by upping interest rates. As India’s developers continue to build large complexes and townships, homeowners are beginning to feel the pinch of rising rates of borrowing. People in the market for a home are deferring their purchase. In a three-part series, Mint brings you the story of the homeowners, the developers, and the peripheral industries of advertising and interiors all of whom are reeling in their own ways, from what is arguably a softening market.
Nitin Mathur, a senior official at an IT firm in New Delhi, is not a happy man.
Three years ago, when he moved into his dream home in the South Delhi suburb of Gurgaon, his main worry was the colour of his walls, the style of the living-room furniture and to ensure all his mail came to the right postal address. Now, the 33-year-old dreads opening his letters. Every other month he gets a missive that drains his wallet and makes his home more expensive.
“I have lost count of the number of letters I have received on the change in monthly instalments,” says Mathur. It has “shot up by Rs5,500 within two years”.
Mathur is part of a breed of young Indians who opted to be homeowners instead of tenants, aided by government measures that provide tax incentives for home-loan borrowers. But in just six months, the country’s central bank has raised a key lending rate by almost 200 basis points and in two years, home loan rates have moved up from 7.50% to 11.50%.
That’s costing consumers dear. Mathur’s home loan of Rs35 lakh was taken in 2005 at a floating rate of interest from HSBC Bank. At that time, the interest rate was 7.25%. But now, with the increase in interest rates, both his loan tenure and equated monthly instalment (EMI) have increased. To soften the blow, Nitin’s bank increased the loan tenure from 20 years to 24 years. But his instalments of Rs29,000 now run into Rs34,000.
“All this has happened just in the span of two years,” says Mathur. “I am lost. It is like my EMI keeps on increasing with no respite.”
While some banks do provide the option of converting a loan at a floating rate to a fixed rate one, consumers are not keen on this option since they have to pay a conversion charge for this. “It is a long procedure. I don’t want to convert,” says Mathur.
For a start, consumers have to pay a fixed conversion charge, which could range between 1% and 2% of the total outstanding loan amount. And the fixed rate at 13.25% is still higher than the floating rate of interest at 11.50%. The conversion charge in the case of Housing Development Finance Corp. (HDFC) is 1.5%, says a spokesperson for the firm, among India’s top mortgage companies.
If borrowers decide to change the lender, apart from converting to fixed rate, then they are most likely to pay a foreclosure penalty of 2% of the outstanding amount as well as 0.5-1.0% of the new loan amount to the new lender as processing and administrative charges.
Even those who opted for fixed amount repayment to ease the pain of rate fluctuations (they would continue to pay the same EMI, nomatter how high interest rates went, but their loan tenure would increase) are feeling hemmed in.
“I opted for a fixed EMI, which has resulted in an increase in my loan tenure,” said Anadi Sah, a visualizer with Mindshare Interactive, an online media agency, in Delhi. “The tenure of my loan has increased from 15 years to 19. I am trapped.”
Sah took a loan of Rs9 lakh and pays an EMI of Rs8,000 every month. Aniruddha Mitra, an accountant with a quasi-government media organization in Kolkata, took a home loan on a floating rate of interest in the hope that he would benefit when the interest rate drops. Instead, they rose. “Right now, I have tried to tackle the situation by voluntarily increasing my equated monthly instalments,” he says.
At 51, Mitra’s main aim is to avoid having a protracted payment period.
Nearly 90% of borrowers in India take loans on a floating rate basis, which is adjusted to the rate of interest set by the central bank. In a bid to rein in inflation in an economy that grew at 9.4% last year, the bank has raised rates and its efforts have paid off. Inflation has dropped in the last few months from 6.73% in February 2007 to 4.28% in June 2007.
But home loans have become expensive. A 20-year home loan of Rs35 lakh has become costlier by Rs9,144 every month, if the payment period remains unchanged. That’s because floating rates have been continuously rising and have increased by three to four percentage points over the past 18 months to touch 11.5-12%.
As of April 2007, home loan rates in India varied from 13% to 14% (fixed) and 10.75% to 12% (floating). According to Sanjay Joshi, deputy general manager of HDFC, for every 50 basis point increase in the rate of interest, EMI on a 15-year loan goes up by Rs31 per lakh.
Rising interest rates are also dissuading prospective buyers. Last March, just as Gerry D’Souza, a resident of Virar, one of Mumbai’s far-flung suburbs, was considering buying a house in the city, cheered by his and wife’s recent pay hikes, interest rates and monthly instalments shot up.
“They have gone up from around Rs900-950 per lakh eight months ago when we started looking, to around Rs1,100-1,150 now,” says D’Souza. “This puts a house in the Rs60-75 lakh range that we were looking at, out of our budget for now.”
There is a growing number of customers that, like the D’Souzas, are more cautious of buying because of unaffordable property prices and a rate of interest.
“Due to both of them (real estate prices and interest rates) rising considerably in the last year, affordability has become an issue,” says Sunil Rohokale, head (mortgage finance), ICICI Bank, one of India’s top home-loan lenders.
It’s not just customers who are waiting in the sidelines. The knock-on effect is being felt by the banks, and has started affecting the home-loan portfolio of some banks.
“In the past six months, we have seen about 15% drop in home loan applications,” says a senior official with the retail banking division of the Kolkata-based United Bank of India. He didn’t want to be identified because he is not authorized to speak to the media. “The last rise in interest rate by 50 basis points or 0.5% on 9 April has also had a bearing on the application flow.”
K. Raghuraman, executive director of Punjab National Bank, the fourth largest bank in India, says there is a flattening in the home loan portfolio. “I see demand for home loans flattening on account of all recent changes (in interest rates),” he adds.
HDFC, however, has reported a 30% growth year-on-year for home loans for the year ended March 2007. The company reported loan approvals of Rs33,332 crore for 2006-07, compared with Rs25, 634 crore for 2005-06. “A decade ago, a house cost over 20 times an individual’s annual salary, while today it has come down to just over five times. Moreover, interest rates that were 16-17% a decade ago are currently around 11-11.5%,” an HDFC spokesperson said.
Not everyone takes comfort in that. “It was my dream to own at least a one-bedroom house in Delhi. But I just cannot afford it,” says 28-year-old Muzammil Sayid, a senior technical support officer at HCL Technologies. “Prices are way too high for me to even think of buying property. And now, home loan rates have also increased. I cannot see myself living in my own house anywhere in the near future.” he adds.
Waiting for a correction
To encourage consumers to purchase homes, some real estate developers have joined hands with bankers to offer schemes where the developer will share a part of the instalment burden of the consumer for a certain period of time.
For instance, the Faridabad-based Achievers Builders has launched a plan wherein the builder will pay the consumers’ costs for up to two years. Under this plan, the buyers do not have to pay instalments until they take possession of the house. This plan applies to home loans of any amount.
Achievers Builders has tied up with HDFC, UTI Bank, Birla Home Finance and ING Vysa for this scheme, a company official said. In the case of apartments, the developer will pay the EMI up to two years and in the case of villas, it will pay them for up to a year.
“Yes, such a scheme does exist. Some developers have tied up with banks to encourage consumers to buy homes,” says Joshi. “(But) people who buy for investment purposes are thinking again. They would like to buy when the rates are low,” he said.
Pinky Ahuja has been looking to buy a house in Mumbai’s suburbs. While she is willing to pay up to Rs28-30 lakh for a flat of around 800 sq. ft, none of the sellers she has met are keen to bring their prices down.
Ahuja, 42, is an investor—she lives in a company accommodation given by her husband’s multinational employer in Bandra. “Real estate in Mumbai is still an attractive buy, but not at these prices,” says the infotech professional.
Both sellers and buyers are waiting and watching which way the market will swing.
“Only those who need a house will buy at this time. Otherwise, you would be better off waiting for the market to crash,” says Ahuja.
(Sanchita Das also contributed to this story.)