The Reserve Bank of India (India’s central bank) recently reduced the repo rate (rate at which RBI lends to the various banks) by a quarter-percentage point, to 7.75%. This was the first reduction seen in nine months as the Indian economy grappled with high consumer inflation (recently moderated from over 10% in the last few months). As key policy rates remained unchanged, the economy struggled with a tepid investment environment. The RBI however remained steadfast and did not give in to the government pressure to bolster the flagging GDP growth by reducing key rates as controlling inflation remained the prime concern.
During pre-GFC days, the real estate sector had been one of the major beneficiaries of the affordable borrowing rates, with development firms enjoying project loans while benefitting from the demand for residential housing remaining robust due to affordable home loan rates. A revision in lending rates to infuse liquidity in to the market had been a major demand emanating from the real estate sector as increasing supply and a range-bound absorption rate had increased the overall inventory levels in the residential market. The impact of the lowered rates was immediately apparent as most banks announced reduction of 25-50 bps in home loans.
It is evident that the expected price-correction will not materialise any time soon with the developers getting some breathing space. Cheaper home loans have given developers the opportunity to maintain price levels while less expensive advances will positively impact their current cash positions. Buyers will also be encouraged to enter the residential market as their home-loan EMIs (Equated Monthly Installments) will reduce. This will also help the developers offload their housing units’ inventory.
Developers cannot be faulted entirely for their prices as increasing construction costs and rising land valuations have added incremental factors to project costs. Thus, price reductions have not been made easy in this scenario. It also did not make business sense for them to sell at cost and hence the predictions of price correction have not materialised, though the developers have had to invent innovative selling schemes to boost sales volumes.
A macro-level approach is needed to control rising residential prices. While the Tier II and III cities remain attractive in terms of prices, the larger cities need more proactive government action to benefit buyers. Actual benefits to buyers will not accrue by merely lowering home loan interest rates but by providing inflation protection for the whole sector. A more robust land policy and unlocking land holdings will definitely reduce the land value component cost in a residential project. Higher financial allocations and access to cheaper monies will also allow for improving the operating margins.
In the absence of policy reforms, the long term solution to the problem of meeting India’s housing demand at affordable price-levels is not in sight. An impetus from cheap home loans is unlikely to convert to demand every time, and while it is important in context with situational necessity, we should not make it a pre-requisite for the residential sector to perform well while ignoring structural reforms.
More on 'Residential' in 'India'
- Delhi NCR’s luxury residential market thrives in H1 2024August 30, 2024
- Repositioning Bengaluru’s residential hotspotsAugust 8, 2024
- Pune’s residential market: beyond a retirement havenMay 31, 2024
- Fractional ownership of vacation homes in IndiaApril 30, 2024
- Technologies reshaping India’s housing sectorApril 5, 2024
