Bottom Line: It is not about impact of rate cut but the homebuyers’ psychological shift indicates revival.
At a time when the discussion across the country has been on the decks being cleared for the formation of real estate regulator, Anurodh Agarwal, a homebuyer was wondering whether to jump from the fence sitting to buy a house now. The dilemma was not just about whether this is the right time to buy. He was rather thinking that even though his concerns with the functioning of the sector and the delivery processes were addressed with the regulator, the interest rate was still higher.
He was not alone to be apprehensive with the high interest rates. There have been many fence sitting buyers like Anurodh who think the interest rate was too high and hence it was better to wait for some rate cut before they could buy a house. The announcement of Reserve bank of India (RBI) Governor Raghuram Rajan to cut the repo rate has hence addressed their concerns to a large extent now.
The RBI Governor Raghuram Rajan in his bi-monthly monetary policy review has cut the repo rate by 25 basis points to 6.5 per cent; thus clearing the decks for home and auto loans, among other loans, to become cheaper. The policy interest rate has been now lowered to more than five-year low, while indicating the prospect of another cut later this year if inflation trends stay benign.
It may be argued that a rate cut of 0.25 basis points would not make any significant impact on the EMI burden of the homebuyers. But the fact of the matter is that the sector has been reeling under slow sales mainly due to the subdued sentiments. Most of the home seekers were fence sitting, either concerned with the delivery timelines or with anticipation of rate cut, if not price correction.
The rate cut, therefore, has come at the most appropriate point in terms of the timing. While the sentiments have significantly improved post the clearance to a real estate regulator for the sector, the repo rate cut can have the multiplier effect.
The critics may also argue that this is only a marginal rate cut in terms of the EMI burden of the homebuyers, but the RBI Governor has put the ball in the court of the banks. The onus is now on the banks as to how much interest rate they cut to revive the business and the market. The pressure is definitely mounting on the banks to reduce the interest rates, as they have not passed on the full benefits of previous rate cuts to the consumers.
Both the homebuyers as well as the developers have nevertheless welcomed the rate cut. They feel it will have a multiplier effect along with the real estate regulator. The rate cut may be marginal this time around, yet it has the potential to impact the psychology of the homebuyers.
Welcoming the rate cut, Manju Yagnik, Vice Chairperson, Nahar Group feels this will create positive sentiments and spearhead growth for the realty sector, bringing some respite to customers with home loans during the upcoming festival of Gudi Padwa and Akshaya Tritiya.
“The real estate sector is going through a makeover and we welcome any sops given by government at this stage that will help in propelling the sector. This rate cut is significant in terms of sending out a positive signal to homebuyers and industry alike that government is serious about providing housing to its people,” says Yagnik.
Kishore Bhatija, Managing Director – Real Estate Development, K Raheja Corp calls the repo rate cut as a step in the right direction. “Although there were higher expectations of the cut, this is certainly good news for developers as well as buyers. It is also encouraging to hear that going forward the Central Bank’s policies will remain accommodative. We hope the banks will pass on the benefit to the industry.”
Ashwin Sheth, CMD, Sheth Corp also feels the accommodative stance and the indication towards further easing of policy rates will renew further interest in the real estate sector. According to him, the reduction in the repo rates will help in bringing down the home loan interest rates which in turn is likely to bring in some amount of relief to the homebuyers. But, the banks will also have to pass down the benefit to the homebuyers to encourage the prospective buyers to move a step closer to purchase their dream home.
“Interest rate is one of the important factors as the Equated Monthly Installments (EMI) is directly linked to it. Therefore, if the banks pass on the benefits and the EMIs fall, we feel the demand for the housing should witness momentum as far as buying new properties are concerned. Faster GDP growth and declining interest rates will help real estate companies generate more sales and propel the growth of the industry,” says Sheth.
There is a general feeling within the built environment of real estate that the rate cut has been announced keeping in mind the thrust of Government of India on ‘Housing for All’. It is hence expected that there will be more rate cut in near future, thus catalyzing the demand in the sector. Most of the analysts believe this kind of sops have critical linkage with the potential of the sector in job creation, improving social infrastructure and give a boost to the Indian economy as a whole.
However, the big question remains: whether the banks will pass on the benefits of the rate cut to the consumers? If only the banks could sense big business ahead if they reduce the rate of interest, then this marginal rate cut will be the beginning of the turnaround of fortunes of the real estate sector in general and housing market in particular.
