Thursday, 4 June 2015

Will RBI rate cut push property buyers into action?

The RBI governor has reduced repo rates for the third time this year in line with the Chinese economy. This augers well for the consumer as home loan interest rates are expected to drop. Even more significantly he announced that he expects banks to drop their lending rates. He also indicated in his speech that he is willing to err on the side of risk by dropping the rates and then assessing if the economy responds well to it or not.

"With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path (to 4 per cent in early 2018), however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty. Meanwhile banks should pass through the sequence of rate cuts into lending rates," the bank said.

Both statements are significant. In a market where banks have traditionally announced special rates for new consumers and continued to extract their pound of flesh from old customers, who had to pay enhanced rates of interest, the RBI governor’s statement brings hope. Banks have traditionally only passed the increased lending rates, not so much the lowering rates to the customers.

A survey a few months ago revealed that at least 26 per cent consumers were holding back their real estate decision waiting for falling interest rates. At least 40 per cent felt that high home loan interest rates were an area of concern. Does a 25 basis points rate cut significantly impact the real estate decision? In two ways it does. Firstly, it helps shore up sentiment which is responsible for the current round of slowdown in real estate. Secondly, and more importantly, it has come at a time when there are many completed projects in the market and end users can buy and stay.

In many ways, I feel the timing is just right. The industry gets more access to finance which should start easing the capital crunch it has been facing. The consumer gets the right signals from the policy makers. End users, the most neglected segment of the Indian property market, get the first indication that the environment is just right for him or her to move into the buying mode.

Let me spend a couple of minutes on the end user. Statistics show that 70 per cent of those looking at property listings currently in the market are end-users. This is logical, as for the past couple of years the markets have been flat and returns on real estate investment have been limited. This end-user is highly sensitive to price movements and home loan interest rates. About 28 per cent of demand is for property in the Rs 30 to 50 lakh category. Another 30 per cent demand is for the Rs 70 lakh to Rs 2 crore category. These are two ends of an end-user market where one is entering for the first time and the second is looking to upgrade to a larger more premium unit. Both are sensitive to vagaries in the home loan interest rates.

So does this mean that they will immediately start buying? Our data shows that this segment has certainly been searching for property much more this year than in the previous year. The ground is prepared well and the seeds are ready to sow. Can Governor Rajan’s move be the final element that pushes the real estate market out of the blues?

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