News Point: Can rate cut lead to revival of India’s housing sector? Track2Realty assessment finds it is no panacea to the woes of India’s housing market.
The sentiment driven India real estate has gone euphoric with the announcement of Prime Minister Narendra Modi with interest subvention on housing loans for poor and the middle class. The banks were the first to budge and the rate cut by the State Bank of India has also been hailed within the built environment of the Indian real estate and the collective consciousness of home buyers.
However, the rate cut has not answered as many queries as it has raised the critical issue of whether the move is the panacea to real estate woes. Can the rate cut alone revive the fortunes of the sector that is struggling with slow sales and liquidity crunch?
Rate Realities
2017 unveils with lowest housing loan rate in the last 6 years
For the borrowed amount of Rs. 50 lakh as housing loan at present one has to pay Rs. 44,665 as EMI
The rate cut reduces this by Rs. 2,850 per month to maker it Rs. 41,822.
For a loan of Rs. 50 lakh this rate cut makes a saving of Rs. 34,000 yearly
Rishabh Chopra, a retired school teacher in Chandigarh is happy that his elder son will now have to pay lesser the EMI due to rate cut. His son has borrowed an amount of Rs. 50 lakh as housing loan and at present is paying Rs. 44,665 as EMI. The rate cut reduces this by Rs. 2,850 per month to maker it Rs. 41,822. This is no less than a saving of Rs. 34,000 yearly. However, he is also worried at the same time whether his younger son would be able to buy a house now.
“The various reports that are based on economic fundamentals suggest that the price of houses would go up. So, whatever gains come in the form of lower interest rate is thus neutralized. Moreover, my bigger concern is about the macro-economic outlook as interest rate is 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,” opines Chopra.
Needless to add, the housing market boom historically has a direct linkage with the job market growth. The last property rally in this part of the world had been largely IT/ITeS driven. But today the job market is sinking quarter after quarter.
Facts speak for themselves. 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 & jewellery, transport, IT/BPO and handloom/powerloom. The job addition in the first full year of this government fell to just a fourth of 2014 and was only a tenth of the growth seen in 2009, when the UPA was in power.
According to the Labour Ministry’s 27th Quarterly Employment Survey of these eight employment-intensive industries, there were 43,000 job losses in the first quarter of FY 2015-2016. At their peak, these sectors had added 1.1 million jobs in 2010.
The developers nevertheless have their own reasons to believe rate cut is the panacea. Atul Banshal, President- Finance and Accounts, M3M says the much-awaited rate cuts are expected to boost the sentiments dampened by the government’s demonetization move and trigger consumption demand in a big way. Banks have substantial quantum of low cost funds and the reduction in the MCLR (Marginal Cost of Funds based Lending Rate) is expected to positively impact loan growth both in the retail consumer segment and in corporate sector lending, thereby supporting growth.
“The rate cuts will give boost to retail credit. This will be most visible on the home loan portfolio. Home loan rates are now at their lowest levels for several years. Lower home loans could see the fortunes of the sector picking up, especially in the affordable housing segment. The rate cut will immediately benefit new home loan borrowers,” says Banshal.
Nikhil Hawelia, Managing Director of Hawelia Group believes rate cut is substantial this time around. According to him, it is more than just sentiment boost up for the home buyers but not enough to revive the fortunes of the sector.
“I feel we are heading to the right track now but a long distance to travel before we can vouchsafe that the sector’s pain points have been addressed for both the developers as well as the home buyers. The concerns of the home buyers vis-à-vis the job market and the uncertainty in economy has to be factored in as well,” says Hawelia.
In a nutshell, the year 2017 has begun on a positive note for the Indian real estate where both the developers as well as the home buyers have reasons to cheer. But the larger and critical issues that affect the macro-economy in general and the housing market in particular have not been addressed yet.
And hence while the rate cut and the sops announced by the Prime Minister might have brought immediate cheer in the market, economic rationale suggests this is no panacea for the revival of the fortunes of housing market.
Key announcements along with rate cut
Home loans for poor and middle class people upto Rs 0.9/1.2 mn will get 4%/3% interest subvention
In villages, interest subvention of 3% for home renovation loans upto Rs 0.2 mn
Banks asked to raise cash credit limit of small business to 25% from 20%
Credit guarantee for small traders to be raised to Rs 20.0mn from existing limit of Rs 10.0mn
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 0.75mn for senior citizens
In the next 3 months, 30.0 mn 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. 200.0 bn to finance district cooperative banks and societies
By: Ravi Sinha
