With home loan interest rates below 7 per cent, an impression has gained ground that this is the best time to buy a house. Track2Realty takes a closer look at the economic fundamentals that suggest the interest rates are one of the sales catalysts and there are many variables to consider.
Shweta Mohan, a marketing manager with a Delhi-based corporate group, was planning to buy a house for quite some time. Her biggest concern was EMI burden since the interest rates were above 8 per cent for quite some time. So, now that the home loan interest rates are below 7 per cent, she should actually jump into the home buying. Right? No! She is even more apprehensive today with the 30% salary cut and the possibility of future job loss in the pandemic hit economy.
The consumer psychograph of Rajat Sheth, another corporate sector employee in Mumbai, who has not been witness to job loss or salary cut, is no different. For him, it is not the job but the inflation that defeats the advantage of the lower home loan rates. “It is not easy to manage with limited salary and increasing inflation. So, even with the loan rates down I can’t take risk at the moment,” he explains.
So, while it is convenient to assume that the low interest rate on home loans is a temptation to bring the fence sitting buyers back to the property market, the fact is that interest rates are the third criterion behind job security & inflation for an average salaried class home buyer in India.
Historically high interest has not been a deterrent in property buying; nor has there been any empirical evidence of lower interest rate being catalyst to property purchase. For instance, the year 2011 was witness to 13 interest rate hikes on home loans in 12 months. The home loan rate spiked from 10.25% in 2008 to 13% in 2012 but the period was also witness to consistent growth of market transactions.
Video Analysis in English
Lower borrow a catalyst to buy?
Job safety & inflation precedes borrowing cost
Property transactions have spiked even in 13% interest era
Gap in borrowing cost & rental yield still around 500 BPS in India
Borrowing cost & rental yield gap in India highest in the world
Lower interest rate dents the household savings
Home loan growth post lower rates have been in volume than value
LTV of home buyers reduced post Covid-19
DTI ratio of lenders decreased post the pandemic
Industry Overtones
Rohit Garodia, Managing Partner – Pecan Reams believes that the interest rates on home loans is a big factor determining the market condition since a large number of consumers today apply for home loans. The prevalent interest rate will have a direct impact on the EMI that a person is liable to pay. If the EMI is kept at a lower level it will facilitate more buyers to invest in residential properties. Hence, there is a clear impact of the interest rate on the home investment process.
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“Interest rate cuts have a vast impact on the consumer behaviour patterns and level of consumption that an economy can anticipate. This is because higher valuations tend to translate into larger borrowing and financing costs for things purchased on credit. 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, putting a hindrance on consumption. Higher rates, nevertheless, do serve as an advantage to savers who get more favourable interest on deposit accounts,” says Garodia.
Defending the lower borrowing cost, Aditya Kushwaha, CEO & Director Axis Ecorp categorically says that while the availability of cheaper home loans may not be the only factor driving the real estate market, but it definitely is the important factor home buyers consider before making the decision of buying a home.
“The affordable housing market is already experiencing increased demand, and what is further reining this demand is that home loan interest rates have bottomed out and are at almost a decade low. We are expecting that the buyer of affordable and mid-segment housing will expedite the process of property ownership,” says Kushwaha.
Video Analysis in Hindi
Aditya Kedia, Managing Director – Transcon Developers also echoes the sentiment that cheaper home loans are a big catalyst for home buying. With industry benefitting measures like reduction in stamp duty charges and interest rate and with home loans being at an all-time low, it has definitely helped to streamline a buyer’s investment process. This in turn will lead to unhampered residential sales.
“The rate cut can help the existing buyers by facilitating them to switch over to lower home loan rates, thus supporting them in their property investments. The current low interest rates have helped in creating a conducive environment for the prospective home buyers too, thus enabling these first-time buyers to make property investments,” adds Kedia.
Balanced View
It is true that a lesser gap in rental yields and home loans leads to a more conducive environment to buy a house. In most of the matured property markets of the world the gap between rental yields and borrowing cost has been less than 100 BPS and the only comparable to India would be China where the gap is around 300 BPS. In India the gap that once had been up to the 800 BPS has been reduced to around 500 BPS, and hence there is perception that the lower borrowing cost would lead to higher property transactions.
However, there are many other variables to be factored in before reaching the conclusion that the lower borrowing cost is the prime demand driver. Job market and inflation precedes over the cost of borrowing, as explained above. Moreover, the lower interest rate also affects the household savings in terms of the returns over the savings.
As of now, it is too early to make any conclusive statement since the pandemic hit economy has a lot many variables where economic survival is the key. However, the loan growth in recent times, after the interest rate cut, has been more in terms of volume growth than value growth. For the home buyers, LTV (Loan to Value) has gone down and so is 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. Should you buy a house because of a lower interest rate is a decision that is too personalised, and depends upon the job safety, bandwidth to handle inflationary challenges, and ability to navigate the pandemic-hit economy.
Ravi Sinha
@RaviTrack2media
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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