The speculation of the past year and a half, which has driven land prices up by 30% to 100% and real estate stocks up as much as 2,000%, may be coming to an end.
Home Loan Rates fell to multi year lows of 7.5% in early 2004. This prepared the basis for the massive increase in Real Estate Property Prices across India.
Over the last three months, there has been a 15-20% price correction in the market across the country in the residential sector. In fact, in many markets, the level of transactions have gone down drastically which has resulted in this dip. The recent fall in the stock markets has been pretty unnerving for all of us. Both the major large cap indices, the Sensex and the Nifty have dropped over 15 per cent in less than a month, with some indices dropping much more than that. One index has taken a big blow, that is real estate sector.
This current correction has mainly come about owing to inflation and rising interest rates. Hence, analysts are asking to stay away from stocks in sectors such as real estate and automobiles. These are negatively correlated with the interest rate cycle and may, therefore, underperform over the next 12 to 18 months. More and more investors are moving away from interest rate sensitive stocks.
What triggered all this? The Origins of Indian Property Market Bubble can be traced to the interest rate reductions made by the NDA Government in the years following 2001. Home Loan Rates fell to multi year lows of 7.5% in early 2004. This prepared the basis for the massive increase in Real Estate Property Prices across India. Low Interest rates triggered huge interest in individuals to borrow to own their own homes and this started increasing demand for quality real estate across India, after 2003.
A flat which fetches a monthly rent of Rs.7000 cost Rs 25 lakh. The EMI on a 15-year loan of Rs 20 lakh for that flat now works out to Rs 20,000.
The unrealistic growth in realestate, has worried The Reserve Bank of India to raise the risk weightage on real estate loans extended by banks. Which followed with both the main lenders in the home loan segment, ICICI Bank and HDFC Ltd, which control almost 50% of the market, increasing interest rates. For instance ICICI has increased its interest rate from 7.5 in 2005 to 11.5 as of now. People who borrowed loans in late 2004 or early 2005 are the worst hit. The EMI has thus gone up by almost 33% to Rs 1,066 per Rs 1 lakh for a loan repayable over 20 years for those who took a loan two years back.Consider this, A flat which fetches a monthly rent of Rs.7000 cost Rs 25 lakh. The EMI on a 15-year loan of Rs 20 lakh for that flat now works out to Rs 20,000. Now surely it makes more sense to rent than to buy a house now. Many people were buying property in the last two years when Hyderabad was riding the boom, in the hope of capital appreciation. People were looking at housing less as a place to live in and more as an investment.
With EMIs for apartment owners on the rise, rentals are hitting the roof. No two-bedroom house is available in the peripheries of the city, for less than Rs 5000 per month (excluding, electricity, and water bills) and some requiring an advance ranging between Rs 50,000 to Rs 1 lakh. This has even led to discrimination of the tenant. Those who are non-IT professionals are shooed away when looking for a rented house because the landlord prefers "Software" engineers.
All these factors starting with interest rates rise, reducing profit margins and adding to that plunge of the real estate stocks, creates a bleak outlook. Many investors who bought a residential property at a very high rate may consider selling their property before the prices start to dip. Not to mention those who may default on the loans. If selling pressures increased as investors tried to book profits, the bubble might well and truly burst. If that happened, the consequences can be catastrophic.
If selling pressures increased as investors tried to book profits, the bubble might well and truly burst. If that happened, the consequences can be catastrophic.
The unrealistic rise in real estate prices and rising interest rates, has locked the majority out of the housing market, and make more distant the dream of owning a home in a country where the majority in our cities are not home-owners, and the majority of home-owners crowd their families into one or two room apartments. The second negative consequence of high real estate costs is that they drive up wages because it has become more expensive to live in a big city. In other words, the competitiveness of Indian companies suffers.
Deloitte expects that private equity may bring in another $6.81 billion to the residential-property market by 2008.
But there is hope always hope as growth is expected in residential, retail and office sectors due to the country's growing population, rising incomes and the shift to nuclear families from extended families. In fact, the National Council for Applied Economic Research in New Delhi estimated that the total number of households in India will increase to 221.9 million in 2010, from 204.3 million units in 2006. Also, Deloitte expects that private equity may bring in another $6.81 billion to the residential-property market by 2008. Current mantra, New buyers should just wait and watch.
Source: Compiled By Cyberabad Times from the Sources Below
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ICICI Bank hikes interest rates
Home loan rate hike to hit old borrowers
Interest rates to remain under pressure
HDFC hints at rate hike next week
EMIs on home loans up
RBI spying on home loans
