Home loan rates to stay hard for some more time

By Vipin Agnihotri

Home loan borrowers in India have to wait for a bit before they see interest rates softening up. Home loan experts while speaking to The India Street has said that this can only happen if the Reserve Bank of India (RBI) relaxes few of the fiscal curbs it has imposed on banks.

With loans no longer affordable in nature, and the ongoing correction in real estate prices, there is a possibility that the demand for home loans can slow down marginally. It is worth mentioning in this regard that the home loan industry grew by 25 per cent in 2006-07 compared to the previous year, but fact remains that the growth is expected to come down to around 18 per cent in the current financial year.

In my opinion, the correction phase in the real estate industry would continue till September. But during the festival season the market should see the reversal of the present trend. According to one estimate, real estate price are expected to correct between 15 to 20 per cent in certain pocket from its peak level.

“The real estate sector will again witness the same type of buoyancy it showed last year in 2008,” pointed out Dr Suvrokamal Dutta, real estate expert. Point to be noted here is that demand is a function of cost of funds - the interest rate- and the price of the product. According to Dr Dutta, in the coming eight to 10 months, both these would undergo changes.

There is no doubt that the present trend towards price correction would be finished, and more importantly they would stop falling any further. Simultaneously, if one takes into account the inflation trend, the interest rate would also begin softening during this time.

The main factor is the availability of housing in few areas. Though, there is a strong possibility that prices would remain inelastic in those regions. Furthermore, there were few pockets in almost all the cities where prices had not seen any correction because of the fact that no new products could be made available.

For example, in the case of Delhi, since the demand is far greater than supply, there has been hardly any correction, but experts believes that there is certainly few correction outside Delhi where supply of fresh products is coming or expected to come.

In other word, because of the rise in the interest rate, average size of the home loan in the last one or two years has dip down to Rs 12 lakh from Rs 14 lakh a year ago. The borrowers eligibility has come down due to substantial rise in the interest cost.

Interestingly, banks have not seen any slippage in their book. "The increase in interest rate and subsequent increase in he monthly installments have not affected the portfolio almost all the borrowers are the end users," pointed out Rajiv Sabharwal, Senior General Manager at ICICI Bank, and in-charge of its home loan division.