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Rising interest rates deflate housing demand

Rising interest rates deflate housing demand
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First Published: Mon, Feb 05 2007. 11 16 PM IST
Updated: Mon, Feb 05 2007. 11 16 PM IST
MUMBAI: Property consultants are beginning to see a distinct slowdown in house-buying activities since the restrictive policy steps imposed by the Reserve Bank of India (RBI) have started to sink in.
Though RBI has left the mortgage business of commercial banks untouched in its January policy, earlier it had raised the provisioning for Rs20 lakh plus standard home loans from 0.4% to 1% .
It had also raised the risk weight for real estate loans from 125 % to 150 %. The cumulative effect of this—banks need more money to create a safety cushion in case home loans go bad. The cost of home loans for consumers has gone up by over 2.5% over the last one year—from around 8-8.50% to 10.5%-11%.
In the last few months, there has been a 20-30% drop in the number of houses sold, said Balaji Rao, managing director, Starwood India Capital, a property consultant.
Not only have the volumes dropped, in value terms, the growth in home loan sector has slowed down to 25% per month from 30% per month for some mortgage players, said Anshuman Magazine, managing director of CB Richard Ellis, another property consulting company.
Consultants attribute both hike in interest rates as well as property prices to the fall. Referring to the drop in volumes, Starwood’s Rao said, “This could be the first sign of a correction (in prices).”Magazine of Richard Ellis said this is not the beginning of a correction but a rationalization of prices in the housing market.
The trend is also confirmed by Rakesh Singh, who heads mortgages for Standard Chartered Bank. “We are already seeing an impact on housing demand. Liquidity has been squeezed out of the system through a series of rate hikes. So there is bound to be an impact over the short term.”
However, a spokesperson of Housing Development Finance Corporation (HDFC), India’s oldest mortgage player, said it had not seen any slowdown in demand for home loans. The head of retail banking in India’s largest mortgage player, ICICI Bank, was not immediately available for comment.
According to RBI’ s quarterly monetary review, till October 2006, housing loans grew by 32.3%. “Since then, there have been two rate hikes and a hike in banks’ cash reserve ratio draining out over Rs13,000 crore liquidity from the banking system. The demand for home loans has indeed come down,” said a banker. Finance minister P. Chidambaram has asked public sector bankers not to hike home loan rates.
Gaurav Mashruwala, a Mumbai-based financial planner, said his clients have been asking whether they could hold back investments in housing. He has been advising those buying for investment purposes to hold back or buy in distant suburbs where property prices have not appreciated too much. “But if people are living in rented houses and looking to buy a home, I advise them to go ahead and buy,” Mashruwala said.
According to Magazine, those buying houses for investment purposes have been restrained by the interest rate hike. The home loan market, about Rs1,35,00 crore in 2005, has been growing by over 45% in last five years. Despite that, mortgage credit accounts for slightly over 12% of bank credit and over 6% of India’s gross domestic product (GDP). In contrast, housing loans account for 12% of China’s GDP and 22% of Malaysia’s GDP.
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First Published: Mon, Feb 05 2007. 11 16 PM IST
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