Aman, a 32-year old in suburban Mumbai, is not particularly excited about the interest rate cut by the RBI earlier this month.
“I want to buy a house at a place which is less than an hour’s commute from my work place. However, there is nothing available in my budget. A cut in the interest rate will barely save a few thousand on my EMIs. I don’t think it is a good enough reason for me to buy a home,” said Aman, who earns a salary of ?10 lakh annually.
This trend is the general sentiment in metros with real estate prices at high levels and no sign of “affordable housing”. Clearly, a rate cut is unlikely to lure consumers to take home loans.
Most banks have seen some consolidation in the housing loan portfolio and retail growth was primarily driven by vehicle loans, consumer durables and unsecured loans.
“Housing is not growing as much and though the interest rate cut will give a push to this demand, I do not expect the growth to pick up any time soon..,” said Jairam Sridharan, President, Consumer Banking at Axis Bank.
The pace of growth of home loans declined to 16.4 per cent in November 2014, from 18.1 per cent in the year-ago period, according to Reserve Bank of India data.
On the other hand, growth in consumer durables and other personal loans improved to 46.8 per cent (32.8 per cent in the year-ago period) and 16.2 per cent (13.3 per cent), respectively.
A 0.25 per cent reduction in base rate on a ?50-lakh home loan, with tenure of 20 years (average ticket size for metro cities), will lower the EMI by about ?830 per month if the bank’s interest rate gets lowered from 10.15 to 9.9 per cent.
This translates into a savings of only ?9,960 annually. With consumers finding it difficult to buy high-priced homes, the reduced EMIs are hardly a solace.
According to analysts, the repo rate (the minimum lending rate of banks) is likely to come down by a full percentage point (100 bps) over the next 12 months, which means the amount of saving on EMIs could be in the range of ?3,000-4,000 a month.
Bankers suggest the repo rate cut of 25 basis points (25 bps) is not enough, though the downward cycle of interest rates has started.
A larger cut in the days to come will lead to banks cutting base rates and therefore a significant drop of about 100 basis points will trigger some momentum in the home loan segment.
However, the real estate market has witnessed a re-orientation and developers are now largely focusing on affordable homes. This will go a long way, though definitely not all the way, in bridging the existing wide gap between demand and supply of affordable homes, according to a report by real estate consultant Jones Lang LaSalle (JLL) India.
Anuj Puri, Chairman & Country Head, JLL India, said, “In 2015, developers will become more earnest about right-sizing and right-pricing their offerings. Smaller, yet better-designed and more efficient homes will define the residential real estate market in 2015, and selective corrections in some of the over-priced cities will help bring about faster sales for stagnated supply of larger configurations. Townships will become more prevalent, and the supply of luxury homes will moderate to align with the slow demand dynamics for these offerings.”