Defer plans to buy a house
With housing loan interest rates shooting up, the middle class and upper-middle class have begun to defer plans to buy a house.
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Prasad Chandran Nair, an army officer, is happy he did not finalise his plans because the cost of construction would have moved up by 30-40 per cent with the price of steel, cement, bricks, sand and a host of other inputs going up in tandem with the inflationary spiral of the economy.
Nair says, “It is a once-in-a-lifetime investment and every salaried person invests as much as he can in his dream home. And built into the budget would be a 20-25 per cent cost escalation, which could translate into well over 50 per cent with today’s soaring inflationary spiral. So the rising costs and growing interest burden will really pinch the home budget. It will be better to wait and watch and go forward with a more realistic housing budget rather than be stranded mid-way.”
But he has his regrets — not taking the decision to invest in a home early, before surging input costs and spiralling interest rates became the norm.
Flow of capital slowing
Reflecting the sentiment of the retail investors, the flow of capital into the real-estate and housing sectors has begun to slow down, in line with the tempered growth of the Indian economy over the last year.
Growth in credit to the real-estate sector by scheduled commercial banks fell from 78.7 per cent in March 2006 to 41.5 per cent in March 2007. Despite this sharp fall, as a percentage of credit to the sensitive sectors, the real-estate sector continues to remain quite high at 91.2 per cent. Figures available from the Economic Survey also indicate that the growth in credit extended by banks to the housing sector has also fallen sharply.
Data from the Reserve Bank of India indicate that the growth in loans to the housing and real-estate sector has fallen by 50 per cent, for the housing sector to 15 per cent, and the real-estate sector to 33 per cent in November 2007. The primary cause behind the fall in credit extension has been the sharp upswing in the interest rate regime. Most people who can defer their investments in housing and real-estate are postponing their decision by another six months to one year, waiting for the interest rates to fall.
‘Robust picture’
Contradicting this national trend, the extension of housing loans by Federal Bank continues to be robust, M. Venugopalan, Chairman of the bank, said. However, the bank had been, all along, shying away from extending credit to the real-estate sector mainly due to the inherent risks associated with it and its new classification in the risk weighted assets category. The bank’s policy of focusing on the retail customer and cutting out speculative investors has paid rich dividends and helped bring down the share of its non-performing assets even further.
Venugopalan said the reason why housing loans in his bank continue to grow is also because there has been no wild fluctuations in its interest rates from rock bottom to peak rates, unlike some other players in the market.
Investment vs residence
While conceding that the demand for housing loans has been coming down at the national level, M. Valsan, Executive Director, South Indian Bank, said this was mainly as a result of waning interest on the part of those looking at housing as an investment rather than as a place of residence. The interest of the first-time house builder still persists. After hitting its peak in the recent past, the demand for apartments in cities such as Kochi has touched a plateau. This has been mainly due to growing cost of construction squeezing the builders’ margin and the rising interest rate reducing the margins for the investor.
Funds to the commercial real-estate sector had also begun to dry up as the Government and the Reserve Bank of India strove to curtail excessive speculation in the real-estate sector.
With the Reserve Bank of India stipulating that housing loans of over Rs 20 lakh would be classified as higher risk weighted asset, the cost to the banks, and thereby to the customer, had gone up another 1.5 per cent, banking sources said. This has also curtailed the interest of the customer who was looking at housing mainly as an investment to be converted into profit in the short-run. While most of the customers who look at housing as mainly as a place to live would definitely abhor converting this asset into a liability, bankers said that most of the non-performing assets among housing loans would accrue from customers who had perceived housing more as an investment.
Credit Policy
The bankers were also of the opinion that the RBI, through its recent Credit Policy, has sent a positive signal to the housing and real-estate industry. The revision in the threshold limit for housing loans to individuals with risk weighted of 50 per cent from Rs 20 lakh to Rs 30 lakh is also expected to sustain the demand for housing loans.
The bankers were optimistic that the inflationary spiral would be tamed with the monetary and tariff measures adopted by the Government. Early indications suggest that the prices of food, steel and cement have all begun to fall in the recent past. Taming the inflationary spiral would also curtail the current spike in interest rates.
As Venugopalan said, spiralling interest rates reduces the repayment capacity of the customer, forcing many customers to wait for the interest rate regime to ease and stabilise before they enter the housing market.
More India business stories
Prasad Chandran Nair, an army officer, is happy he did not finalise his plans because the cost of construction would have moved up by 30-40 per cent with the price of steel, cement, bricks, sand and a host of other inputs going up in tandem with the inflationary spiral of the economy.
Nair says, “It is a once-in-a-lifetime investment and every salaried person invests as much as he can in his dream home. And built into the budget would be a 20-25 per cent cost escalation, which could translate into well over 50 per cent with today’s soaring inflationary spiral. So the rising costs and growing interest burden will really pinch the home budget. It will be better to wait and watch and go forward with a more realistic housing budget rather than be stranded mid-way.”
But he has his regrets — not taking the decision to invest in a home early, before surging input costs and spiralling interest rates became the norm.
Flow of capital slowing
Reflecting the sentiment of the retail investors, the flow of capital into the real-estate and housing sectors has begun to slow down, in line with the tempered growth of the Indian economy over the last year.
Growth in credit to the real-estate sector by scheduled commercial banks fell from 78.7 per cent in March 2006 to 41.5 per cent in March 2007. Despite this sharp fall, as a percentage of credit to the sensitive sectors, the real-estate sector continues to remain quite high at 91.2 per cent. Figures available from the Economic Survey also indicate that the growth in credit extended by banks to the housing sector has also fallen sharply.
Data from the Reserve Bank of India indicate that the growth in loans to the housing and real-estate sector has fallen by 50 per cent, for the housing sector to 15 per cent, and the real-estate sector to 33 per cent in November 2007. The primary cause behind the fall in credit extension has been the sharp upswing in the interest rate regime. Most people who can defer their investments in housing and real-estate are postponing their decision by another six months to one year, waiting for the interest rates to fall.
‘Robust picture’
Contradicting this national trend, the extension of housing loans by Federal Bank continues to be robust, M. Venugopalan, Chairman of the bank, said. However, the bank had been, all along, shying away from extending credit to the real-estate sector mainly due to the inherent risks associated with it and its new classification in the risk weighted assets category. The bank’s policy of focusing on the retail customer and cutting out speculative investors has paid rich dividends and helped bring down the share of its non-performing assets even further.
Venugopalan said the reason why housing loans in his bank continue to grow is also because there has been no wild fluctuations in its interest rates from rock bottom to peak rates, unlike some other players in the market.
Investment vs residence
While conceding that the demand for housing loans has been coming down at the national level, M. Valsan, Executive Director, South Indian Bank, said this was mainly as a result of waning interest on the part of those looking at housing as an investment rather than as a place of residence. The interest of the first-time house builder still persists. After hitting its peak in the recent past, the demand for apartments in cities such as Kochi has touched a plateau. This has been mainly due to growing cost of construction squeezing the builders’ margin and the rising interest rate reducing the margins for the investor.
Funds to the commercial real-estate sector had also begun to dry up as the Government and the Reserve Bank of India strove to curtail excessive speculation in the real-estate sector.
With the Reserve Bank of India stipulating that housing loans of over Rs 20 lakh would be classified as higher risk weighted asset, the cost to the banks, and thereby to the customer, had gone up another 1.5 per cent, banking sources said. This has also curtailed the interest of the customer who was looking at housing mainly as an investment to be converted into profit in the short-run. While most of the customers who look at housing as mainly as a place to live would definitely abhor converting this asset into a liability, bankers said that most of the non-performing assets among housing loans would accrue from customers who had perceived housing more as an investment.
Credit Policy
The bankers were also of the opinion that the RBI, through its recent Credit Policy, has sent a positive signal to the housing and real-estate industry. The revision in the threshold limit for housing loans to individuals with risk weighted of 50 per cent from Rs 20 lakh to Rs 30 lakh is also expected to sustain the demand for housing loans.
The bankers were optimistic that the inflationary spiral would be tamed with the monetary and tariff measures adopted by the Government. Early indications suggest that the prices of food, steel and cement have all begun to fall in the recent past. Taming the inflationary spiral would also curtail the current spike in interest rates.
As Venugopalan said, spiralling interest rates reduces the repayment capacity of the customer, forcing many customers to wait for the interest rate regime to ease and stabilise before they enter the housing market.