Wait n Watch property market
The double-digit inflation will have an adverse effect on real estate sector in the country, with residential sector, which is already facing a slowdown, taking the hardest hit. If the present conditions continue, consultants and bankers say the prices might be corrected by 15% to 20% in the next couple of months.
Consultants and bankers feel that in the present condition, buyers should wait for some time before going in for a house. However, they must also keep an eye on the market, as it will rebound as soon as the inflation, and consequently interest rates, start coming down.
However, if an end-user gets a good property of his choice at a reasonable price, he can take the plunge. But, in that case, they should buy at a borrowed fund on floating rate, because when the interest rate goes down, they will be benefited by a lower EMI.
The rising inflation affects buyers badly, as it results in rise in prices and their invest-able surplus goes down. At the same time, to contain the inflationary pressure, when the government increases interest rates, home-loan rates become costly.
A single percentage point rise in interest rate leads to increase in the equated monthly installment (EMI) by almost 7%. Because of the recent measures taken by the Reserve Bank of India (RBI), the interest rate is likely to go up by 0.5 percentage points to one percentage point. In fact, in the last three years, interest rate on home loan has gone up by almost four percentage points from
7.5% to 11.5%. Such a steep rise in the interest rates has resulted in an increase in the EMI by around 30%. At the same time, as the inflation has gone up, average savings have also dwindled. Consequently, high inflation affected the house buyers very adversely.
At the same time, as inflation goes up, the input costs in the construction of a building also go up. But, as the buyers’ buying capacity has gone down, builders are finding it difficult to increase the prices of apartments. This has affected, builders margin adversely.
As the builders are finding it difficult to sell, they are delaying launch of the products, a big builder of the National Capital Region said. He argued that if one launches a project with only 10% of the total project sold, he has to fund the implementation of the entire project. If he cannot sell the project for the next one year, the interest cost on the fund to complete the project, in itself, will make it unviable. The cost of fund for builders is as high as 24%.
And, this has affected the construction activity in the country. Not only have the small cities like Jaipur, Chandigarh and Lucknow been affected by the slowdown, but now, even the NCR, Pune and Bangalore also also been sucked into this vortex. In the NCR, micro-markets like Greater Noida, Indirapuram, Noida, Gurgaon and Faridabad are also getting affected by the slowdown.
But, as the economic activities have not shown any sign of cooling down, it will create huge mis-match in demand-supply situation in times to come. The demand for office space in the NCR region is still very strong. According to Jones Lang LaSalle Meghraj, the office space supply in Gurgaon alone in 2008 will be in the range of 11 million sq ft, which is substantially more than the addition of the space in 2007. But, still rentals are rising because of strong demands.
A senior consultant said that this clearly indicates that people are postponing the purchase of house because of rise in the interest rates, which has made the EMI on the house loan almost unaffordable. But as soon as the interest rates come down, the demand will surge.
Therefore, investors and end users should wait for the opportune moment to buy a house. For investors, the sector is likely to give a handsome return in the near future. At the same time, end users should keep a close watch on the market conditions to buy a house. For developers the sector is likely to turn around in the next one year, according to a consultant. Therefore, those developers, who will invest to construct and give delivery in the next 18 months, the return would be very handsome. The consultant said when the revival in the sector will happen, people would like to buy ready-to-move-in flats.
Consultants and bankers feel that in the present condition, buyers should wait for some time before going in for a house. However, they must also keep an eye on the market, as it will rebound as soon as the inflation, and consequently interest rates, start coming down.
However, if an end-user gets a good property of his choice at a reasonable price, he can take the plunge. But, in that case, they should buy at a borrowed fund on floating rate, because when the interest rate goes down, they will be benefited by a lower EMI.
The rising inflation affects buyers badly, as it results in rise in prices and their invest-able surplus goes down. At the same time, to contain the inflationary pressure, when the government increases interest rates, home-loan rates become costly.
A single percentage point rise in interest rate leads to increase in the equated monthly installment (EMI) by almost 7%. Because of the recent measures taken by the Reserve Bank of India (RBI), the interest rate is likely to go up by 0.5 percentage points to one percentage point. In fact, in the last three years, interest rate on home loan has gone up by almost four percentage points from
7.5% to 11.5%. Such a steep rise in the interest rates has resulted in an increase in the EMI by around 30%. At the same time, as the inflation has gone up, average savings have also dwindled. Consequently, high inflation affected the house buyers very adversely.
At the same time, as inflation goes up, the input costs in the construction of a building also go up. But, as the buyers’ buying capacity has gone down, builders are finding it difficult to increase the prices of apartments. This has affected, builders margin adversely.
As the builders are finding it difficult to sell, they are delaying launch of the products, a big builder of the National Capital Region said. He argued that if one launches a project with only 10% of the total project sold, he has to fund the implementation of the entire project. If he cannot sell the project for the next one year, the interest cost on the fund to complete the project, in itself, will make it unviable. The cost of fund for builders is as high as 24%.
And, this has affected the construction activity in the country. Not only have the small cities like Jaipur, Chandigarh and Lucknow been affected by the slowdown, but now, even the NCR, Pune and Bangalore also also been sucked into this vortex. In the NCR, micro-markets like Greater Noida, Indirapuram, Noida, Gurgaon and Faridabad are also getting affected by the slowdown.
But, as the economic activities have not shown any sign of cooling down, it will create huge mis-match in demand-supply situation in times to come. The demand for office space in the NCR region is still very strong. According to Jones Lang LaSalle Meghraj, the office space supply in Gurgaon alone in 2008 will be in the range of 11 million sq ft, which is substantially more than the addition of the space in 2007. But, still rentals are rising because of strong demands.
A senior consultant said that this clearly indicates that people are postponing the purchase of house because of rise in the interest rates, which has made the EMI on the house loan almost unaffordable. But as soon as the interest rates come down, the demand will surge.
Therefore, investors and end users should wait for the opportune moment to buy a house. For investors, the sector is likely to give a handsome return in the near future. At the same time, end users should keep a close watch on the market conditions to buy a house. For developers the sector is likely to turn around in the next one year, according to a consultant. Therefore, those developers, who will invest to construct and give delivery in the next 18 months, the return would be very handsome. The consultant said when the revival in the sector will happen, people would like to buy ready-to-move-in flats.