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Rate cuts by PSU banks to boost realty demand again!

16th November, 2008

The Economic Times

Rate cuts by PSU banks to boost realty demand again!
The Economic Times
It may be a small step, but it has still brought some relief to the realty sector which has been going through tough times. Last week, several PSU  banks lowered lending rates by 50-75 basis points (bps). With the latest move, home loans are set to become cheaper.
So what’s in store for the prospective buyer? Will this move in any way impact buyer behaviour? And to what extent will demand go up in the real estate sector? Developers say although such a rate cut lowers the interest burden on a mid-income family, more dramatic cuts are needed to make housing affordable. “A 75 bps rate cut is not enough to fuel demand. It is too small a step to reverse the negative sentiment.
Construction of housing for the masses will only gain momentum which can be a catalyst for overall growth. Capital/credit should be made available at 7.5-8.5% per annum to credible developers and end-users,” says Mohinder Puri, CEO and MD of Delhi-based Puri Constructions.
Agrees B P Dhaka, COO of Parsvnath Developers. He says housing demand will get a real boost when the interest rate on home loans falls to 9%. “This is a welcome step. But the real effect will come through only if interest rates come down to 9%. The present cut will only have a marginal impact.”
Vijay Jindal, CMD of SVP Builders, feels it is expected that home-buyers will take advantage of this drop in interest rate but to a limited extent. “Last few months have been bogged down by the high home loan rates and the end-user was waiting for it to come down. However, a cut down of 75 bps is not going to turn the future of real estate. If the banks bring down these rates to a greater extent then probably we will see a rise in the number of people coming forward to buy.”
At present, many PSU banks, including State Bank of India (SBI), Oriental Bank of Commerce (OBC), Central Bank of India (CBI) and Allahabad Bank, have reduced prime lending rates (PLR). Global real estate consultancy Jones Lang LaSalle Meghraj (JLLM) explains what end-users can expect after this cut and how the EMI component will get smaller. Depending on the actual home loan amount, one would be able to compute the difference now.
For example, if the EMI on a home loan of Rs 1 lakh taken on a 20-year tenure was Rs 1,200 earlier, it will now be Rs 1,000. This will either reduce repayment amount per month, or the repayment period. Typically, low-to-mid end families will opt for reduced EMIs per month since this will increase the money at their disposal. For the High Income Group (HIG) borrowers, monthly savings is not a very important consideration, so they will opt for shortened repayment durations instead.
Even though the state-owned banks have lowered their PLR, private banks are yet to announce any rate cut. But it is expected that they too are likely to tread a similar path soon. So should a buyer wait for interest rates to fall further? Says Anuj Puri,  chairman and country head of JLLM, “Home buying is not primarily dictated by interest rate dynamics but by the genuine need of the buyer and also the availability of a good deal.
If one is in need of a home and gets a good deal, home loan dynamics are and should not be the overwhelming consideration. In the absence of both — a good deal and real need — it of course makes sense to wait for further reductions in interest rates.”
Mr Jindal of SVP Builders too feels that a property is not about market dynamics alone and this is the ideal time to buy as end-users will get more options for a final decision. Also, as prices are not expected to fall further after the recent rate cut, many feel that one shouldn’t wait in the hope that prices will come down. “Although this step is bound to have a positive impact on the real estate industry and will help actual users take a positive decision, we feel it will increase the number of transactions instead of having any impact on property prices,” asserts Sunil Bedi, MD and Chairman of JMD.
Agrees  Mr Dhaka of Parsvnath Developers who says that this move will in no way reflect in property prices which are expected to remain stable. The current initiative of some banks may not result in a dramatic change but for the EMI-pressed buyer, every penny counts. And even a small rate cut means saving up a little more every month. As they say, something is better than nothing!

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