Personal Finance

Rate hikes send slow market into a tizzy

R. Balaji | Updated on June 18, 2011 Published on June 18, 2011

With buying interest slack due to rising costs, an increase in interest rates could make buyers think twice.

Real estate developers have expressed concern over the recent 25 basis point hike in key rates by the Reserve Bank of India.

Coming as it does at a time when the residential segment is seeing dampening of demand in most metros, the hike in repo rate which has a potential to make home loans costlier is worrying the industry.

As it is developers' complain that costs have gone up by about a third with inputs including sand, cement, labour, not to speak of labour shortage, becoming dearer.

The repeated hikes by the RBI are hitting the buyers' affordability and increasing outgo, they say.

Developers are hoping that the hike will not be followed by a corresponding increase in home loan rates by banks and housing finance institutions as seen in the last round of hikes when the hike in rates had been steeper.

Leading developers in Chennai, where a slowdown in residential sales is perceived to be in the offing, are worried. Over the last one year, there had been a pick-up in residential demand, but that is not likely to sustain if the present trend of increasing costs continues.

Mr R.V. Shekar, Lancor Holdings Ltd, says the hike in home rates over the last one year have hurt as the buying capacity is eroded even as buyers face the challenge of having to take larger loans to meet the rising costs. Developers are also facing the brunt of the across-the-board rise in the cost of construction which has gone up from about Rs 1,200 a sq.ft to about Rs 1,800 in the last one year.

The move by the RBI could be counter-productive if it impacts the growth of the economy. First, the manufacturing sector has slowed down and now construction is taking a hit as costs go up.

Mr Suresh Jain, Managing Director, Vijayshanthi Builders believes that the most affected would be those on a tight budget as they find the units becoming expensive.

Even those in the high end could adopt a wait and watch attitude. It is those with deep pockets who can make a purchase decision as they see construction costs and input costs going up with time. Interest cost highs and lows are cyclical and will not hit the high-end segment.

Credai concern

The Confederation of Real Estate Developers Association of India has expressed concern on the impact RBI's move will have on the residential demand.

Mr Lalit Jain, National President, Credai, said in a press release, “I feel increase in interest rate is counter-productive and only gives rise to inflation instead of curbing it. The Government should adopt policy reforms which will bring down prices and increase GDP rate. We also feel lack of coordination amongst various departments such as finance, housing, urban development, commerce and environment is a major issue in restricting growth and increasing costs. If proper reforms are not brought in housing and SEZ policy commitments are not kept with, we will see a major economic disaster in the country which will result in chaotic urbanisation.”

Mr Pradeep Jain, Chairman, Credai, said, the RBI's strategy to manage inflation by raising key rates over the last one year is yet to show results. The government needs to look at other measures such as a proper public distribution system and crackdown on hoarders.

Credai is the apex body for private real estate developers and represents over 6,000 developers through 20 state/city level member associations across the country.

Mr AnujPuri, Chairman & Country Head, Jones Lang LaSalle India, an international property consultant, said the hike “is far from good news for the real estate sector, especially in terms of housing. Purchasing activity had already dropped visibly during the last tranche of interest rate hikes, and we will see a further drop in buyer interest now.”

As for developers coming down on their prices to counter the negative effects of this hike, a lot depends on the financial ability of individual developers to hold on to their current pricing and risk losing sales till the situation improves. Developers with enough capital bases are less likely to relent on their pricing than smaller developers with an urgent need to sell their stock.

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