FE Editorial Double trouble

Written by The Financial Express | Updated: Jul 31 2008, 06:09am hrs
Home loan rates have increased on average from 7% in 2004 to 13%-plus now and, post-RBIs big rate hikes, will increase further. What this does to homebuyers paying EMIs is clear. What it does to the real estate market is more complicated. People have started to defer buying homes. As demand has begun to drop, value bubbles formed in certain Tier-II and III cities are witnessing a slowdown and in areas like Gurgaon, Noida and Ghaziabad, prices have dropped by 15-20% in the last six months. The 14-company BSE Realty Index that peaked at 13,647 points on January 14 this year, dropped by 64.8% to an all-time low of 4,797 points on Tuesday. For prospective borrowers willing to brave high rates, both private and public sector banks are becoming more selective about loan disbursment and growth in advances to the housing sector have come down from 25% in FY07 to 13% in FY08. However, property developers are not able to cut prices proportionally in response to falling demand because raw material prices have shot up sharply. These trends are a reminder of the situation in 1995 when the sector went bust and stayed a buyers market for the next eight years. Supply was far more than demand and hardly anyone speculated on property. The market picked up in 2004 with sharp increases in global liquidity, selective capital account liberalisation, easy credit policies and rise in disposable incomes of the younger working population. As a result, 24% people under the age of 30 own their homes now; the figure was less than 10% in 2000.

Of late, real estate developers have been caught in a vicious circle of sluggish demand and rising cost of capital. Availability of finance has been a problem with rising cost of debt and drying up of equity funding. There have been instances of developers borrowing at interest rates ranging between 24% and 36% against 500% collateral. The lack of liquidity is likely to impact deliveries, leading to project delays. This could also lead to distress sales and defaults by builders. There are concerns that the property market has risen too high and too fast in relation to economic fundamentals. But remember: the country currently faces a shortage of 20 million housing units; the financing of owner-occupied housing, in particular, holds out enormous market potential.