Home loan rate cut and sops: Immediate cheer but can it revive the sector?


While the rate cuts by banks and the sops announced by prime minister Modi, may have brought immediate cheer in the housing market, economic fundamentals suggest that it may not be enough to revive the fortunes of the real estate sector

Prime minister Narendra Modi’s new year’s eve announcement, on interest subvention for housing loans for the poor and the middle-class, was soon followed by rate cuts by various banks, including the government-owned State Bank of India.

While these moves have been welcomed by the real estate fraternity and home buyers, the moot question that remains is whether a rate cut alone, can revive the fortunes of the real estate sector, which is struggling with slow sales and a liquidity crunch.

Rishabh Chopra, a retired school teacher in Chandigarh, is happy that his elder son will now have to pay lesser EMIs due to the rate cut. However, he is also worried about whether his younger son will be able to buy a house.

“Various reports seem to suggest that the prices of houses, will go up. So, whatever gains come in the form of lower interest rates, is thus neutralised. Moreover, my bigger concern is over the macro-economic outlook, as interest rates are not the first criterion to buy a house. The employment outlook is bleak for my younger son to commit for such a long tenure of EMIs,” explains Chopra.

 

What the interest rate cut means for home buyers

  • 2017 begins with the lowest housing loan rates in the last six years.
  • For a home loan amount of Rs 50 lakhs, at present, one has to pay Rs 44,665 as EMI.
  • The rate cut reduces this by Rs 2,850 per month, to make it Rs 41,822.
  • For a loan of Rs 50 lakhs, this rate cut makes a saving of Rs 34,000, yearly.

See also: Interest subsidy for housing loans up to Rs 12 lakhs: Modi

 

How the job market affects real estate

Historically, any boom in the housing market, has a direct link with the growth of the job market. The last property rally, was driven by the IT/ITeS sectors. However, today, the job market is quite poor. The Modi government took charge in mid-2014 and for that full year, 4.93 lakh jobs were added, across the eight employment-intensive industries – textiles, leather, metals, automobiles, gems and jewellery, transport, IT/BPO and handloom/powerloom. The number of jobs fell to just a fourth of that in 2014. In the first quarter of FY 2015-2016, there were 43,000 job losses, according to the Labour Ministry’s 27th Quarterly Employment Survey of these eight employment-intensive industries. At their peak, these sectors had added 1.1 million jobs in 2010.

 

Interest rate cuts may boost sentiments, but fundamental challenges remain

Atul Banshal, president – finance and accounts, M3M, nevertheless, maintains that the much-awaited rate cuts, will improve sentiments, which were dampened after the government’s demonetisation move, and trigger consumption demand in a big way.

Banks have substantial low-cost funds and the reduction in the marginal cost of funds-based lending rate (MCLR), will fuel the growth of loans in the retail consumer segment and in corporate sector lending, he says. “The rate cuts will give a boost to retail credit. This will be most visible on the home loan portfolio. With home loan rates now at their lowest levels in several years, the fortunes of the real estate sector could pick up, especially in the affordable housing segment. The rate cut will immediately benefit new home loan borrowers,” Banshal explains.

Nikhil Hawelia, managing director of the Hawelia Group, believes that the rate cut, this time, has been substantial. According to him, it will definitely boost the sentiments of home buyers but will not be enough to revive the fortunes of the sector.

“We are moving on the right track now but we still have a long way to go, before we can say that the sector’s pain points have been addressed for both, the developers and the home buyers. The concerns of the home buyers, vis-à-vis the job market and the uncertainty in the economy, have to be factored in,” says Hawelia.

 

Key announcements along with rate cut

  • Home loans for poor and middle-class people upto Rs 9 lakhs and 12 lakhs, will get 4% and 3% interest subvention, respectively
  • In villages, interest subvention of 3% for home renovation loans upto Rs 2 lakhs.
  • Banks asked to raise cash credit limit of small business to 25% from 20%.
  • Credit guarantee for small traders to be raised to Rs 2 crores from the existing limit of Rs 1 crore.
  • Government to pay 60 days interest for loans availed by farmers for rabi season, from district cooperative banks and societies.
  • 8% interest on 10-year deposits up to Rs 7.5 lakhs for senior citizens.
  • In the next 3 months, 3 crore Kisan credit cards will be converted to RuPay cards, which will enable them to buy/sell directly through the card and there will be no need to rush to banks.
  • NABARD will be given an additional Rs 200 billion, to finance district cooperative banks and societies.

(The writer is CEO, Track2Realty)

 

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