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While it is convenient to assume that low interest rates on home loans will prompt the fence-sitting home buyers to make property purchases, the fact is that interest rates are only the third criterion after job security and inflation, for an average salaried-class home buyer in India.
Here are some examples:
- Shweta Mohan, a marketing manager with a Delhi-based company, who was planning to buy a house, was concerned about the EMI burden when the interest rates were above 8%. However, now, although home loan interest rates are below 7%, she is even more apprehensive owing to a 30% salary cut and the possibility of future job loss in the COVID-19 pandemic-hit economy.
- Rajat Sheth, another corporate sector employee in Mumbai, feels the same. While Sheth has not been witness to job loss or salary cut, he feels that the inflation defeats the advantage of low home loan rates. “It is not easy to manage with limited salary and increasing inflation. So, even with the reduced loan rates I cannot take a risk at the moment,” he explains.
Historically, high interest rates have not deterred property buying, nor has there been any empirical evidence to show that low interest rates act as a catalyst to property purchase. The year 2011 witnessed 13 interest rate hikes on home loans, in 12 months. The home loan rate also increased from 10.25% in 2008 to 13% in 2012 but this period also saw consistent growth in real estate market transactions.
How will low interest rates on home loans help home buyers?
Rohit Garodia, managing partner, Pecan Reams, believes that the interest rates on home loans are an important factor in determining market conditions, since a large number of consumers today apply for home loans. “Interest rate cuts have a vast impact on the consumer behaviour patterns and level of consumption that an economy can anticipate. When interest rates go down, borrowing tends to become inexpensive, making outsized purchases on credit more affordable, such as home mortgages or credit card expenses. On the other hand, when the interest rates go up, borrowing tends to become more expensive, thereby, hindering consumption. Higher rates, nevertheless, are advantageous to savers who get more favourable interest on deposit accounts,” says Garodia.
Aditya Kushwaha, CEO and director, Axis Ecorp, categorically says that while the availability of cheaper home loans may not be the only factor driving the real estate market, it definitely is an important factor that home buyers consider, before making the decision to buy a home. “The affordable housing market is already experiencing increased demand and what is further fueling this demand, is that home loan interest rates have bottomed-out and are at almost a decade low. We are likely to see affordable and mid-segment home buyers expediting the process of property ownership,” says Kushwaha.
Aditya Kedia, managing director of Transcon Developers, maintains that measures, such as the reduction in stamp duty charges and the all-time-low interest rates, have definitely helped to streamline a buyer’s investment process. “The rate cuts can help existing buyers, by facilitating them to switch over to lower home loan rates. The current low interest rates have also created a conducive environment for first-time buyers to make property investments,” adds Kedia. This in turn will lead to unhampered residential sales, he says.
Is this the best time to buy a house in India?
A smaller gap between rental yields and home loans, leads to a more conducive environment to buy a house. In most of the mature property markets of the world, the gap between rental yields and borrowing cost is less than 100 bps. The only real estate market comparable to India, would be China, where the gap is around 300 bps. In India, the gap that once stood at 800 bps, has now reduced to around 500 bps. Hence, there is perception that the lower borrowing cost would lead to higher property transactions.
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However, in a pandemic-hit economy where economic survival is the key, there are many other variables that need to be factored in, before reaching the conclusion that lower borrowing cost is the prime demand driver. Mohan and Sheth’s concerns illustrate that job market conditions and inflation are more important than the cost of borrowing. Low interest rates also affect household savings, in terms of the returns on the savings.
The growth in the loan market in recent times, following the interest rate cuts, has been more in terms of volume, rather than value. For home buyers, the LTV (Loan to Value) ratio has gone down and so has the DTI (Debt to Income) ratio of the lenders. So, while the overall home loan environment seems favourable for home buyers, the scale of economic uncertainty is the variable that is keeping everyone apprehensive. The decision to buy a home, hence, will depend on one’s ability to navigate the pandemic-hit economy.
What is rental yield?
Rental yield refers to the annual rate of returns from rentals that a property owner can earn from the capital invested in the property.
Will low home loan rates boost property sales?
While low home loan rates result in lower cost of borrowing, other factors such as the economic situation and individuals; present and perceived future financial capacity will ultimately decide investments in property.
(The writer is CEO, Track2Realty)