Business | Investment
Priced out of the property market ?
High home loan rates and price of houses are likely to deter a section of NRIs.
- By Gaurav Ghose, Financial Features Editor
- Published: 23:41 July 25, 2008
It's not the first time in the past five years that home loan rates in India have risen. For three years since 2004 interest rates were raised routinely. In September 2007 rates were slashed, and in February and March this year, several public and private sector banks continued with the rate cuts.
The cuts were, however, short-lived. With inflation reaching an ominous, 13-year high in June of 11.6 per cent, bank interest rates were raised again on July 1.
Fixed rate home loans are now priced between 14 and 14.75 per cent, while the variable or floating rate option varies between 11 and 12 per cent.
This time it's different. Retail prime lending rate of home loans at 14.25 is the highest in the last 10 years.
Also, with an escalation of construction costs, a result of inflation and high borrowing costs--houses in India are not coming cheap.
The real estate boom in the past few years had brought in the speculative element adding to the high prices of homes. But at that time interest rates were relatively lower and inflation was within limits. Now, with a slowdown in many residential projects, there is a feeling that speculation might decline and bring down prices. But that wish may not come true. Speculation might decline but the prevailing high inflation will keep the prices high, affecting as much the home buyer as the developer.
For many non-resident Indians (NRIs) belonging to the salaried middle-class, the situation is not unlike for Indians back home. With spiralling inflation and meagre increments in salary, the decision to buy their first home is likely to be put off. High home loan rates become an added spoiler.
Pankaj Ganjoo, head of private banking, GCC and North Africa, ICICI Bank, says that higher interest rates creates a vicious circle that ultimately creates a pause in the minds of home buyers that include the NRIs.
"The high interest cost in itself creates a mismatch. With interest rates going up, the cost of construction goes up and property prices are higher which you may not be able to afford. So, obviously, you would not be able to buy a house of your choice. And your capacity to take a loan goes down. Also, the propensity to repay equal monthly installments gets into a problem."
But Ganjoo recognises that "affluence" here in the UAE or Gulf can be seen at a lower job level, which is not there in India yet. The salary is tax-free here and, so, there is a difference in the ability to pay. "Where this issue comes in is probably at the mid-manager level or at a lower level--persons who have a relatively better capacity to repay."
He is not so sure whether the same person living here is willing to buy a house at the prevailing prices back home. "Ultimately it boils down to the fact that he will find out that there's a huge price escalation. So 'why should I pay it,' he will ask himself."
However, it's too early to see a trend of NRI customers in the UAE holding themselves back, bank and property officials point out.
"Though we haven't seen a slowdown as yet, the middle class may start waiting now," says Ashok Gupta, chief executive officer of Bank of Baroda in Dubai. "As the cost of borrowing goes up, a certain percentage of people may not go for house purchase."
A property exhibition organiser based in Dubai echoes similar thoughts, but he makes a difference between those looking at properties for their own use and those opting for investment.
Some dampening
"Yes, there will some dampening of demand. An interest rate rise anywhere in the world has an effect. But the great thing about property investing is that no matter how high interest rates go, people still need to live in houses," says Sunil Jaiswal, CEO of Sumansa Group, which organises The Indian Property Show in Dubai.
Cycles of interest influence the buyers' decisions. There will be some who will delay their decision to buy a property. But there will be others who will seek a 15- 20-year period loan and opt for the prevailing floating rate option, hoping that though the rate might still go up a bit in the coming months but it will come down again soon enough.
"It does affect the demand for investment properties, but it doesn't affect that much the demand for buying one's own house. From the statistics we have, 51 per cent of the NRIs here are looking for a house. That's a decision they are going to make, and they are looking from a very long-term perspective," Jaiswal adds. "[Even] in terms of investment, we haven't seen any kind of negative effect as of yet. That's not to say that there won't be one. But when it will happen? Well, let's wait and see."
Ajay Verma, assistant branch manager of the Dubai branch of HDFC Bank, Indian's largest mortgage company, agrees. "I don't see as yet any slowdown in the loan applications of people who want to buy homes for their own use. If there will be a slowdown, it will be in investment buying."
For S. Ganga, 41, a private school teacher based in Dubai, it is policy of wait-and-watch. He has been mulling over buying an apartment in the eastern Indian city of Durgapur where his wife hails from. He feels lucky to have bought a flat in Chennai on a fixed rate with the entire amount being disbursed already.
"I will wait for the interest rates to go down before I start thinking of applying for a loan," he says. "I may even give up on the idea of buying a second home," as his family plans to eventually settle in Chennai.
Hit by prevailing inflation, both at home and here, middle income Indian expatriate families such as that of Sandip Sen are being forced to make continuous readjustments to their family budget so that they don't slip on the increased equal monthly installments (EMIs).
For Sen, 44, a mechanical engineer with a private firm in Dubai, who had taken a 10-year loan on variable rate from a private bank in 2003 for an apartment in Kolkata, it's a mixed feeling.
The higher mortgage payment and the rising prices back home, where his family stays, have meant cutting corners and keeping an eye on the monthly budget, he says. "And I have to be careful in my spending habits here, with high inflation in the UAE."
But for him it's not all bleak. Having taken the loan in 2003, he has seen bank interest rates go up and down, and now up again. He has also seen exchange rates fluctuate. Now the rupee has weakened against the dollar/dirham, putting more rupees in the hand. "Last year the dollar declined, and it was real bad. In a way, it sort of equalises."
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