“The increase in the interest rate has caused a steep rise in EMI which affects one’s capacity to borrow, and this in turn is likely to affect the demand of houses in the market. ET Realty explains the repercussions of RBI’s decision”
With Reserve Bank of
In the last two years, since 2006, because of rise in interest rates, demand for housing sector has remained sluggish. According to HDFC’s affordability chart, the price of a Rs. 25 lakh apartment has gone up by 20% - to Rs. 30 lakh in the last two years. But during the same period, the average income of a person from middle class has also increased by 20% to 6 lakh in 2008, up from Rs. 5 lakh in 2006. That means, the number of year’s income required to buy a house remained the same at 5 years in the last two years, which is also called affordability factor. According to HDFC, affordability factor has improved drastically since 1995 because of the rise in income of an average middleclass person, from around Rs. 1.2 lakh then to Rs. 6 lakh in 2008. But the value of property has marginally increased from Rs 26 lakh in 1995 to Rs 30 lakh But, because of low income and high property prices one needed 22 years’ income to buy a house, the property prices had witnessed an unprecedented rise in 1994 and 1995. But, it crashed between 1995 and 1999; one needed only 6.6 years’ income to buy a house. After that, till 2004, as the property prices stagnated while income rose sharply, the number of years’ income required to buy a house further fell to 4.3 years. That was the period when interest rates also fell. Improved affordability along with lower interest rates drove the property prices to rise sharply thereafter. In the next two year, the property value almost doubled. But as the income also rose sharply from Rs 3 lakh per annum in 2004 to Rs 5 lakh per annum by 2006, the affordability factor increased to only 5 from 4.3. that means, even in 2006 one could have bought a house with 5 years’ income. But by then interest rate rose sharply from around 7.5% in 2004 to 11% in 2006. This led to increase in the EMI by almost 25% on a 20-year loan. This affected demand drastically.
In 2007, there was a slight moderation in the interest rate and it fell to around 10.5%. But with the RBI again resorting to increase in the interest rate to contain inflation, the cost of borrowing will go up. Therefore, the demand is likely to remain sluggish. However, as the affordability factor remained at around 5, there will be a boom once the interest rates fall. The current rise in the interest rate is also due to global concerns like crisis due to sub prime home loan in the
This would also help in bringing down the interest rates. A senior banker said that sooner or later interest rates are likely to correct. If that happens, the property prices are likely to look up. Unitech managing director Sanjay Chandra says the demand for the real estate is still good. However, at present, the demand is coming from the end users and not from the investors. He felt that once the interest rates correct, investors will return to the market driving the property value up.
Courtesy: - ET Realty dt.27th June 2008
Date: 28 June 2008, Saturday
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