The RBI has reduced the repo rate further, raising hopes that the reduction will get transmitted to banks and other lenders. Will a cut in home loan rates boost demand for homes? VTP Realty CEO Sachin Bhandari believes a reduction in home loan rates will not impact demand too much. He also says the tumult in the stock market will be positive for the real estate market because when markets are volatile, investors turn their attention to real assets to diversify risk and preserve capital.Excerpts from an interview with Babar Zaidi.
The RBI has reduced interest rates. Will this translate into lending rate cuts as well?
When RBI reduced the repo rate in February, we had expected lending rates to come down too. But it didn’t happen due to liquidity concerns. After the latest rate cut by RBI, there are again high expectations of lending rate cuts. This time obviously, financial institutions will be under pressure to pass on the benefit, which will definitely ease the pressure that people are having in their personal finances.
Assuming lending rates are cut by 25-50 basis points, will it push prospective home buyers to take the plunge?
When somebody buys a house, the home loan rate itself is neither a trigger nor a deterrent. Buying a house is too important and critical a decision and 25-50 basis points do not make a material difference. The interest rate plays a role in terms of the individual’s eligibility and loan amount calculation. So, from a demand point of view, I don’t see a major impact because of a rate cut.
Many lenders tend to portray that low home loan rates is a good time to buy a house.
This is good marketing, because positive sentiments do push buyers to make a decision. Financial Institutions highlight low interest rates to create a sense of urgency and optimism in the market and it nudges them closer to making that big purchase decision.
Property prices have gone up significantly in the past 1-2 years. Do you expect them to rise at the same trajectory or will there be a slowdown?
Prices of all critical building materials, except for steel, have gone up. Labour costs have also gone up because there’s a shortage. Due to increased real estate activity across the country, labour demand has increased exponentially. These factors have surely impacted the overall construction cost and developers have no other option but to increase prices.
At the same time, I don’t see property prices increasing at the same pace like in the past few years. People are finding it tough to buy a home. In the past 18 months, the job economy has slowed down. People are not able to switch jobs so easily now. So affordability has become an issue today, and developers will eventually be forced to control the cost. Somewhere, prices will have to stabilize.
Some people may be sitting on some cash which they might have taken out of the market. Is it a smart move to use the cash to prepay outstanding long-term loans?
This decision should be based on the financial circumstances of the individual. If one has bought a property where prices are not going to appreciate much, it is advisable to use any surplus fund to prepay the loan and cut down the cost. However, if one has bought a property whose prices are likely to appreciate, one could use the liquidity to take advantage of other available opportunities.
What is your advice for individual investors in real estate right now?
Buying a house remains one of the most important decisions in anybody’s life, so one has to plan finances very carefully. For peace of mind, one should opt for a developer and a financial institution that offer flexibility and multiple options. For instance, certain lenders let customers decide their own EMIs based on their personal finance conditions.
Also, it is advisable to take life insurance equal to home loans in case of any unforeseen circumstances, as the family or next of kin should not be burdened with a huge financial liability.
Some banks try to make life insurance compulsory, which is not the case in reality. Thus, it is better to thoroughly educate the customers on personal finances for them to make informed purchase decisions.
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