In a very real way, the home loan is the driving force behind the Indian residential real estate market. Without a home loan, a large portion of the population would be forced to live in rental houses. Because of this facility, one can be a proud homeowner without having to have enormous amounts of ready cash.
Of course, some would say that the ideal way is to buy a property outright. However, given the high cost of property, home loans are really the only way out. While the borrower certainly needs to contribute a component of the property’s cost himself, he can realistically raise this via personal resources such as family or personal savings.
Due to the central role they play, it is not only home buyers who depend on home loans, but developers as well. Both sides will bemoan the announcement of even a marginal hike in interest rates, stating that it will seriously affect demand for homes. Both will laud a minuscule reduction while simultaneously stating that it is not enough and more was expected.
The common understanding is that when rates rise, potential buyers have less disposable income to buy property and will defer purchases even further. This is disturbing, since the current environment indicates that there will in all probability be further hikes and this would impact the demand for residential property.
Let’s examine what this impact at the level of different budget segments, rather than at an overall market level.
Technically, the buyer segment that is hit hardest by increasing rates is the bottom part of the pyramid — daily wage earners and people on very low monthly incomes who do not yet own a home and seriously want to. It would logically be this segment that becomes averse to buying a home.
However, in line with the government “Housing for All” vision, first-time home buyers in the affordable housing segment have been incentivised with special rate rebates and other measures. Therefore, they still have a lot of reason to go in for home ownership.
HNIs are less affected by home loan rates. Many have the wherewithal to buy the properties they want outright. Even if they do use a home loan, minor variations in interest rates do not play a significant role in their decisions.
Priority list
This leaves the middle-class, which is technically vulnerable to rising interest rates. Most middle-class Indians walk a tightrope of financial balancing wherein they have a number of equally important financial obligations to meet. While owning a home may be high on their priority list, they also need to reserve funds for their children’s education, pay rent, invest for retirement, and so on.
Minor upward revisions in home loan interest rates may not deter the upper middle-class from a home purchase, while they can certainly give pause to a lower middle-class family’s plans. However, middle-class first-time home buyers do have recourse in the interest rate incentives that the government has unleashed for their benefit, as long as the properties they buy fall within certain size and budget parameters.
Simultaneously, increasing rates also means that profits on fixed deposits and some other investment instruments increase. Also, when rates increase, developers — ever sensitive to sentiment — have invariably sought to offset the perceived impact by either reducing their prices, trotting out more lucrative offers, and generally becoming more open to serious negotiation.
This has become a more or less permanent fixture ever since a lot of factors (other than interest rates) began impacting sales. Moreover, borrowers with a good credit repayment history can negotiate with a bank for a better home loan rate.
Perhaps the impact of increasing home loan rates is not as severe as it is made out to be. The average Indian’s dream of owning his own home is stronger than most other impulses, and Indians have been conditioned to wait with bated breath for loan rates to fall.
If they put their aspirations for owning a home on indefinite hold because they believe rates must be a key consideration, we will certainly see “fatalities”. However, we may be looking at a sentiment problem rather than a financial one.
Minimal impact
As we have seen in the stock market, it can swing this way or that, sometimes without any real logical basis. Buyer psychology is equally fickle and can react to media stories, fake discounts and even religious sentiment.
Given the minimal impact that a minuscule interest rate revision actually has on the overall cost of buying a home, it is also more than likely that a home purchase decision which has been put on hold purely on the basis of higher rates was never a serious decision in the first place.
The myth that rates are the one force that should make or break a home purchase is largely the function of a victim mentality. The proactive approach for a first-time homebuyers to take in any given market scenario is to identify the right property, understand what the existing government benefits are, and to negotiate the best possible deal with a developer as well as a bank.
The prevailing herd mentality dictates that the only way out is to wait for optimal property and interest rates. However, if one applies cold logic and the basic psychological premise that neither can ever exist, the field opens up considerably.
— Anuj Puri is Chairman of Anarock Property Consultants.
