RBI rate cut to boost realty demand: BofAML

American brokerage Bank of America Merill Lynch today said the surprise 0.50 per cent cut by RBI is equivalent to a price correction of up to 4 per cent in house prices, and may also help boost the sagging demand. "A 0.50 per cent rate cut, if transmitted to mortgage rate, would be equivalent to 3-4 per cent reduction in housing prices," it said in a note, two days after RBI surprised with a 0.50 per cent cut in repo rates.

A slew of banks, including State Bank of India, Axis Bank, Kotak Mahindra Bank, Andhra Bank and Bank of India, among others, have cut their minimum lending rates or base rate offerings in the past two days. It said housing sales are "strongly correlated" to mortgage rates, income growth and prices, and added that only price cuts can help boost the demand.

Drawing from the experience in 2009 after the financial crisis, it said the 3.50 per cent cut in a three month span had acted as a stimulus to push up demand. However, it added that the same cannot be replicated at present because of the RBI's stance on rates given the high inflation and tepid income growth.

Hence, a price cut is the only alternative which can lift up the depressed demand, it added.American brokerage Bank of America Merill Lynch today said the surprise 0.50 per cent cut by RBI is equivalent to a price correction of up to 4 per cent in house prices, and may also help boost the sagging demand.

"A 0.50 per cent rate cut, if transmitted to mortgage rate, would be equivalent to 3-4 per cent reduction in housing prices," it said in a note, two days after RBI surprised with a 0.50 per cent cut in repo rates.

A slew of banks, including State Bank of India, Axis Bank, Kotak Mahindra Bank, Andhra Bank and Bank of India, among others, have cut their minimum lending rates or base rate offerings in the past two days.

It said housing sales are "strongly correlated" to mortgage rates, income growth and prices, and added that only price cuts can help boost the demand.

Drawing from the experience in 2009 after the financial crisis, it said the 3.50 per cent cut in a three month span had acted as a stimulus to push up demand.

However, it added that the same cannot be replicated at present because of the RBI's stance on rates given the high inflation and tepid income growth.

Hence, a price cut is the only alternative which can lift up the depressed demand, it added.

Source: PropertyatNeoDevelopers.Wordpress.Com

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?

Source: PropertyatNeoDevelopers.Wordpress.Com

RBI may ignore Finmin's call for rate cut

Despite a clear preference voiced by finance minister Arun Jaitley for rates cuts, the central bank is unlikely to follow suit.

Fast Facts: Retail inflation for October was below RBI's Jan 2016 target of 6%; this has led industry and economists to call for rate cut.

The union government would like the RBI to cut the interest rates to push economic growth. But bankers are still not convinced that the RBI will resort to a cut despite the fact that wholesale inflation dipped to a five-year low of 1.77% in October and retail inflation is down to 5.5%.

 A few weeks before the RBI was set to announce the monetary policy--RBI governor Raghuram Rajan will announce the central bank's bimonthly review on December 2--finance minister Arun Jaitley has made his preferences clear on cut in interest rates. “Reduction in the cost of capital will give a good fillip to the Indian economy,“ Jaitley said at the Citi Investor Forum, but added that the decision was the RBI's to make.

The retail inflation for October was below RBI's January 2016 target of 6% and this downward trend has triggered a call from industry and some economists to cut rates.

“Inflation, especially food inflation, has moderated in the last few months and global fuel prices are also down. Therefore, if RBI, which is a highly professional organization, in its wisdom decides to bring down the cost of capital, it will give a good fillip to the Indian economy,“ Jaitley said in his keynote address.

Any rate cut will also give fillip to the real estate sector, which has been badly affected owing to the slowdown in the economy. The RBI chief, who is not entirely convinced, will have to present a cogent case if the RBI were to hold back on rate cuts, as resentment is rising against higher rates in the face of an uncertain recovery, a benign outlook for inflation, and falling global commodity prices.

“All the parameters are indicating that there will be further fall in inflation. Inflation may go up a little bit between November and January of 2015, due to the base effect. But by March it will be well below whatever the glide path that is indicated by the RBI,“ Arundhati Roy, SBI's CMD, said.

“RBI governor has indicated that he will be data driven... maybe, by the end of the fiscal (cut in the interest rate by the RBI),“ she added. Asked if she expected rate cut from RBI next month, she said “no“.

High interest rates are affecting banks also, as this has slowed down the credit off-take. According to RBI data, growth in aggregate deposits accelerated to 12.3% in September 2014, from 11.5% a year ago, whereas gross bank credit decelerated to 9.5%, from 15.1% during the year.

This acceleration in aggregate deposits as well as deceleration in gross bank credit was broad based and seen across population groups, saddling banks with large surplus deposits which now plan to cut deposits rates.

Source: Times Property, Nov 29, 2014