RBI credit policy: Rate hike to squeeze home sales; gloomy outlook ahead

NEW DELHI & MUMBAI: A 25 basis point increase in key interest rates by the Reserve Bank of India today is likely to further squeeze home sales across the country, some developers and bankers said, amid apprehensions that banks may increase home loan rates again.

"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," said Anuj Puri, chairman of property consultancy Jones Lang LaSalle India.

Owing to the last 10 rate hikes by RBI, EMIs for housing loan have risen 25% to Rs 980 per Rs 1 lakh of borrowing, and consequently loan eligibility for homebuyers has declined 20%. "Housing finance companies have no wiggle room available and will necessarily have to pass on this 25 bps hike to the customer," says Anil Kothuri, head, retail lending business at Edelweiss Group.

Customers will now have to reconsider the size and locations of houses they wish to purchase, and many buyers are expected to put off their purchases altogether till home prices come down and rates stabilise.

"This is certainly bad news for existing home loan consumers as banks will certainly increase home loan rates," said Akash Deep Jyoti, head, Crisil Ratings. For new home loan seekers, this will be big deterrent, not just because of the rate hike but also because of the frequency of the rate hike by RBI. "The only positive for a person who is looking to buy a home is the option he has, of buying or not buying. Existing home loan customers are stuck," said Jyoti.

Renu Sud Karnad, managing director of private sector lender HDFC is however of the opinion that this quarter percentage hike will not impact housing demand and loan offtake. Increase in policy rates push the cost of properties up as they increase the cost of funds for the developers, who are already reeling under the pressures created by high input costs. "We then have to pass on the same to end user," Pradeep Jain, chairman of Parsvnath Developers said.

Some builders are hoping that this is the last rate increase by the central bank for 2011. "Any further increase will be debilitating for our sector," said Sanjay Kabra, chief financial officer of the Sunil Mantri group.

Cost of funds for developers is already very high, ranging anywhere between 14.5% to 16%, depending on the credibility of the borrower, and banks have not been willing to lend to the real estate sector in the recent past.

This has forced many developers to tap other sources of funds, which are much more expensive than bank lending. The situation is not likely to improve in the next few months as analysts and economists across the board expect policy rate to be hiked by at least another 50 bps in FY12.