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Lowering home loan rates to benefit real estate
Source: Times Property in The Times of India, New Delhi Mar 21, 2012
There is good news for home loan borrowers. The RBI in its mid-quarter review, while giving guidance on its course of action, says that ' the future action will be towards lowering the rates.'

The apex bank says that the recent growth-inflation dynamics have prompted it to indicate that no further tightening is required.

However, talking about the timing of rate cut, the central bank expressed caution and said, "Notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate action."

The RBI guidance clearly suggests that its future action will depend on the Centre's road map to contain consumption expenditure, which is inflationary in nature.

The credit rating agency Crisil in its report said the government's intent towards fiscal restraint will be an important guiding factor for the RBI before it begins monetary policy easing. Crisil Research believes that if the Union Budget puts forth a credible strategy for fiscal consolidation, the Annual Policy Review in April 2012 is likely to see the start of a reversal of the central bank's tight monetary policy. Edelweiss Research in its report also felt that the pace of rate cuts will continue to depend on evolving inflation-growth dynamics.

At the same time, the Economic Survey 2011-12, which was tabled in the Parliament on Thursday, underlined the need for giving greater attention to asset price-bubbles in real estate and stock markets and their implications for the economy and to the strength of the financial system. "Focus mainly has to be on credit-induced bubbles that create positive feedback loop with business-cycle implications," the survey says. It further says there is scope for sharpening monetary policy and macro prudential tools to deal with such asset bubbles and other risks.

This clearly suggests that the government is not in favour of easy availability of loans at low interest rates to the real estate sector. Easy availability of loans at low interest rates leads to increase in credit flow to the realty sector. This not only drives the prices of the asset up enabling the next borrower to borrow larger amount of money using the same real estate asset; it also creates a bubble which can affect the bank that has given the loan in a default case. But at the same time, availability of loans at high interest rates has affected the sector adversely as it has made the purchase unaffordable.

Interestingly, the Economic Survey underlined a major policy concern on the widening gap between demand and supply of housing units resulting from inadequate housing, and housing finance solutions.

It says that, overall, prudent macroeconomic policy will continue to be important for guarding against any unexpected supply-demand imbalances and price pressures re-emerging. As a part of such policy, greater attention to improved supply capacities - speeding private and public investment - rather than to demand-side management, is once again gaining heightened importance and will represent a major challenge.

Manoj Gaur, the managing director of real estate major Gaursons India, says: "We were expecting rate cuts, which would benefit the real estate sector, and trickle down directly to the property seekers as well. Lower rates are important to boost the weak sentiments in real estate sector. It is not the developers alone, but buyers, too, are eagerly waiting for the home-loan rates to come down. Let us hope that in April, the RBI will give a thought to this aspect."

Gaurav Gupta, the director of SG Estates, however, expressing his disappointment, said that
the RBI in its policy on Thursday clearly gave an indication that controlling prices and managing inflation is far more an important concern than the falling demand and growth. The impact of high interest rates can be clearly seen from the slowing economy growth, risk of default in the repayment of loans by corporates and the inability of the customers in fulfilling their demand for housing. The reduction in repo rate would have been a welcome step, he says. It is a big disappointment from the RBI governor who had sent a positive feeler by reducing the CRR by 75 basis points six days before the announcement of the monetary policy.

The reaction to the reduction in CRR had sent a feeler that the rates would be reduced and growth would be fuelled; but that has not happened. The real estate industry needs some support from the government to come out of the pit of falling demand and increasing input prices, Gupta says.

Tag: Real estate in india, property in india
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