MUMBAI: Growth in home loans has slumped to a five-month low despite banks showering potential buyers with attractive schemes and lower rates due to soaring real estate prices.
Buyers are holding back since an over-24% increase in prices in the past one year is putting homes beyond their reach despite banks lowering interest rates by 100-150 basis points in the past four months. A basis point is 0.01 percentage point.
Home loans have grown by 11.2% year-on-year in September, compared with 15.6% in the same month a year ago. The latest growth rate for home loans is the lowest since April.
"Interest rates have a limited role to play in house sales," said VK Sharma, CEO at LIC Housing Finance, India's second-biggest mortgage lender. "Home prices affect sales more than interest rates. If the house price range is within the capacity of the middle class, then sales pick up."
Facing slowing demand for loans from corporates, banks have been pushing retail loans, especially mortgages, since it is one of the safest forms of lending. But steep prices are stalling sales. More than 80,000 flats remain unsold in Mumbai and the financial capital has lost its crown as the fastest-growing market.
Home prices rose 24.1% year-on-year in the September quarter, according to RBI's house price index. This is higher than the average 20% annual rise in previous two years. Delhi, Kolkata, Chennai and Mumbai saw the sharpest increase of 21-42%.
The total home loan portfolio of Indian banks amounted to 4.2 lakh crore at the end of September.
Starting early August, lenders led by State Bank of India cut interest rates on home loans after RBI cut cash reserve requirements. Many banks followed with attractive schemes. Axis Bank has announced waiver of monthly payments for a year if a borrower has been paying on time.
ICICI Bank has announced cash back of 1% of the monthly instalments at regular intervals. A number of public sector banks have waived processing fee and announced combo offers for home loans and car loans.
"Price of units has a greater bearing on house sales than interest rates, both psychologically as well as in real terms," said RV Varma, chairman of the National Housing Bank. "Buyers have got by and large used to floating rates of interest and expect rates to gravitate towards an average reasonable rate. Price of units hits buyer sentiments directly and more adversely."
Although home ownership is relatively less in India compared with the West, the lack of affordable homes stunts growth.
Outstanding housing loans as a proportion of gross domestic product stands at close to 80% in the US. In emerging markets such as China it is 20% while in India it is 8%.
"For a middle class family, interest rates do not determine but affordability does," said Keki Mistry, vice-chairman, Housing Development Finance Corp.