A Prudent Measure

While new borrowers are trying to weigh the decision to buy a house, analysts and developers opine that the rise in borrowing rates and short term lending by the Reserve bank of India (RBI) would, in fact be buyer friendly in the long run. The RBI has tightened home loan norms by asking banks not to lend more than 80% of the value of the property recently. This means that new borrowers who would have earlier shelled out 10 -15 per cent of the total value of the house will have to pay 20% from their own pockets. It is a method to curb speculation in the real estate field. This may have some impact on the borrowings in the price bracket of Rs 10-50 lakh, mostly represented by end users dependent on loans for creation of real estate assets. This may impact demand for mid level and affordable housing sectors to a moderate level since this is also usually price sensitive and heavily dependent on home loans.

In perspective the RBI has flagged the issue of new schemes such as the 85: 15 or 90:10 that a few developers had floated; all this would give rise to speculation in the market. The RBI aims to curb such speculation and ensure that the benefit is passed on to the end user. There should be no resistance or hesitation on the part of a buyer as it’s the net differential that they need to see.

The central bank has also increased the risk weight for housing loans above Rs 75 lakh to 125 per cent It implies that loans above Rs 75 lakh will now become more expensive. Increase in risk weight age on
Loans over Rs 75 lakh are introduced in order to curb the high real estate prices especially in metros. This may lead to banks hardening the mortgage rates for loans over Rs 75 lakh. However, we see little impact on demand in this sector. Traditionally we have seen that borrowings such as Rs 75 lakh and above is only a fraction of the total cost of the real estate asset and does not amount to the entire permissible loan amount (80%). This implying that purchasers in this category are usually self funded and therefore may see an impact on demand. Only investors seek very high loan to value ratios, not end users. The RBI has prudently acted to ensure that end. Users are encouraged and investors are discouraged from realty buying.

Also, the RBI has made it harder for banks to offer teaser rates where the interest rate is fixed for a few years and later turns into a floating rate. They have been tinkered with a push up cost of borrowing.

In a move to curb inflation the central bank hiked the repo rate (the rate at which the RBI lends to bank) and reverse repo rates ( the rate at which the RBI absorbs excess liquidity from the system) by 0.25% making loans costlier if banks decide to pass on the rate hike The increase in repo rate may not be immediately passed onto the end users and banks may refrain from increasing lending rates on housing loans. Currently banks have reported reasonable demand for housing loan indicating a growth in the residential sector on the whole. Even if there is a corresponding increase in lending rates, given the stability in the economic conditions, mid level and high end housing demand (loan demands of Rs 60 lakh and above) is not expected to see any slowdown is response to this marginal increment in lending rates. In case of an increase, the impact may be felt in the price band of Rs 10 – 40 lakh that too mostly in Tier II–III cities, which may see some negative impact where end users may either revise their purchase plans or differ the same. Under Rs 10 lakh category which comes under the priority sector will remain unchanged.

Although the impact of the RBI’s rate hike would be known after some time, developers and analysts remain optimistic and suggested that the RBI’s new provisions shouldn’t dissuade the end users from buying a home. According, to Goenka the policy would be buyer friendly to the end user. They would be benefited three ways. They would be less exposed to credit risk, it would put pressure on developers to reduce prices and it would keep away speculators.