Rate cut may not prop up metro realty

The move to reduce interest rates for home loans up to Rs 20 lakh by public sector banks may induce some buying in the property market and prompt developers to build more low-cost homes. However, according to developers, this may not be enough to provide a major boost to the residential property market immediately. Some property developers say the rate cut will not help their existing projects in metro cities as current prices are way above the loan limit set by banks.

“The rate cuts will revive demand, which had cooled off in the past couple of months,” DLF CFO Ramesh Sanka says. He says some of DLF’s projects in New Gurgaon and Chennai, which offer homes for about Rs 28 lakh, will benefit. Prompted by a huge demand in the Rs 20-25 lakh category and incentives extended by banks, India’s largest listed developer plans to have ‘many’ launches in the coming quarters in this category.

Smaller developers, which have been building budget homes, expect more large developers to join them. “Developers are already reducing the size of apartments and offering fewer facilities to bring down the cost of dwelling units,” says Gaursons joint MD Manoj Gaur, who has sold several budget homes in Ghaziabad.

Many developers and analysts feel the impact of rate cut will be limited. “The rate cut is not going to help us. At present, we are not building houses priced close to Rs 20 lakh. And, who has the money to purchase cheaper land now to start a new project for cheaper homes?” pointed out Omaxe chairman Rohtas Goel.

Rupesh Sankhe, a real estate analyst with brokerage firm Centrum, says: “A home buying decision depends on prices, interest rate and the sentiment. Prices still need to come down by another 15-20% even in Tier II and Tier III cities to increase the affordability.” Home buyers in smaller cities also have a lower income level and, therefore, would buy only when prices come down further, he adds.

Anshuman Magazine, property consultancy firm CB Richard Ellis’ South Asia MD, feels the sentiment is the most important factor at present. “There is a crisis of confidence right now. If people are afraid of losing jobs, they are unlikely to buy homes.”

The average home loan size in India is estimated at Rs 7.5 lakh. So, the rate cuts for loans up to Rs 20 lakh can potentially have tremendous impact. However, developers and experts beg to differ. Property prices have risen by three fol d in most markets and an average home costs upwards of Rs 50 lakh in Delhi or Mumbai and Rs 25-30 lakh in tier II cities. Therefore, the government’s move is aimed at addressing the need of home buyers mainly in smaller cities besides some metropolitan suburbs.