Hit a home run

With both property prices and interest rates falling sharply, does it make sense to buy a house now?.

In the last two months, things have changed quite sharply for the potential homebuyers. For one, developers have started officially started announcing price reductions. And even banks, mainly in the public sector, have started cutting rates aggressively.

For instance, the country’s largest bank, State Bank of India (SBI) has reduced its home loan rates to 8 per cent for one year. This can be availed up to April 30. Before announcing the scheme, State Bank of India's (SBI's) rates ranged between 8.5 per cent and 11 per cent, depending on the loan amounts and profile of the customer.

Other public sector banks (PSBs) are already offering special rates under a scheme announced in December. The interest rate on home loans up to Rs 5 lakh is fixed at 8.5 per cent and for those between Rs 5 lakh and Rs 20 lakh at 9.25 per cent, along with free insurance.

Even the private sector banks have responded, but not so aggressively. The biggest home loan lender, HDFC, too has started giving discounts since mid-January. Under this special scheme, floating rate home loans up to Rs 30 lakh are at 9.75 per cent and loans above Rs 30 lakh at 10.75 per cent.

Property developers are already on a price-cutting mode. Rajiv Singh, who heads the country's biggest real estate company DLF, has recently said that there is a ‘virtual shutdown’ in the real estate market and prices can further fall by 15 per cent.

In tandem with the market's performance, DLF plans to reduce 15 per cent prices across markets. They also said that their affordable residential housing will be launched at a rate of Rs 2,000-2,500 a sq foot.

Unitech, the country's second largest real estate player, too plans discount in Kolkata and Delhi NCR. Mumbai-based Orbit Corporation has also announced 20 per cent discount in premium projects such as Orbit Grande and Orbit Eternia as it sees a correction of 20–30 per cent in South and Central Mumbai.

Given this backdrop, should one purchase property now?

According to Harsh Roongta, chief executive officer, apnapaisa.com, an online loan portal the interest rate scenario is likely to be benign for some time. So, one should not be influenced too much by the fall in rates.

Even if public sector banks (PSBs) do not reduce their rates, private sector lenders could do so. “We expect a revision in policy rates by 150 basis points. By March-end we expect 50 basis points cut in repo and reverse repo rates. Another cut is likely by June-end. This will evidently affect home loan rates,” says Sonal Varma, India economist at Nomura.

Though most believe that property prices would fall further, but many think that with builders becoming more proactive, there could be some bottoming out by June-end. In many areas, prices have dropped to their late 2005 or early 2006 levels. These include, Gurgaon and Noida in Delhi, Whitefield in Bangalore and distant suburbs of Mumbai such as Kandivali, Malad, Thane and Navi Mumbai.

However, the reality is that though things look better now, buyers are not actually too keen. The reason: Fears of job losses due to the global recession. “Despite the package, buyer interest has been quite low,” says SC Jain, general manager (retail), Bank of India.

And the fears are real. The Indian export sector is on the verge of witnessing nearly 10 million job loss by March, following cancelled orders and higher transaction costs. Many companies have said that they will further cut down jobs or there will be no increment this year.

Also, though rates have been cut, bankers are exercising more prudence. Though PSBs are offering lower rates, the margin money that one has to cough out now is much more. Earlier, banks would happily lend 80-90 per cent of the property price. Many private sector banks even gave over 100 per cent loans for furnishing the home. Today, you would have to pay 20-30 per cent of the margin money because banks fear that property prices could correct further.

The eligibility criterion is also stricter. Many banks would reject the loan application if you have an existing personal loan or credit card defaults. If you have delayed repayment of an ongoing loan, there are chances your loan will not be sanctioned.

Given all these factors, the bottom line is that things are definitely much better. But given that there are indications of further correction in property prices and the fact that more margin money will have to be paid now, you could wait some more.

However, if you need to buy and have already found a house that fits your budget, this could be a good opportunity to get the best deal. For instance, you can convince the builder to waive off the floor rise, get free parking and other amenities. “All these will add up to much bigger discount,” says Ramesh T Jogani, managing director, Indiareit Fund Advisors, a real estate fund.

But be cautious. Experts expect that under-construction projects will be delayed and even scrapped if some developers don't get funding in time. Go for readymade products only or projects that are near completion. Stay away from schemes that require more than three months for completion.