Rising Interest Rates and Realty Prices Mark Doom for Home Loans

By: addi vardhaman

Although Indian realty market is witnessing a compounding growth, owning a home is still a tough dream for many middle class Indians. Earlier (2002-2006), the easy availability of home loans was accelerating the realty growth drive. But, there is now substantial decline in the demand for home loans in India. Major banks have blamed the rising property rates as a reason behind the slash. According to the recent survey, the prices of furnished and semi-furnished houses in the metros and upcoming metros are becoming sky scrapping day by day.

The rising real estate prices is not the sole factor for this decline. However, the decline has been attributed more to the home loan interest rates that have been mounting incessantly for the past couple of months. As per the recent reports of Associated Chambers of Commerce (ASSOCHAM), rise in these loan rate severely affected the housing sector.

The growth of this sector has fallen to 26.6 percent in 2006-07 from 29.1 per cent in 2005-06. The interest rates on home loans rose from 7 percent in 2002 to 12-14 per cent in 2007. This rate has made both lending and borrowing largely unfordable.

Banks are now trying to play safe in this volatile situation and demanding government intervention to curb the increasing real estate prices. No doubt, real estate prices have almost doubled in most parts of the Western India while the same holds true with the Northern and Southern part of the country. Increasing mall culture, heavy requirement of commercial land and the retail boom has made the prices sky high.

An unprecedented hike in property prices is a major detriment behind the fall in demand. This hike has impacted the banks but the effect of rise in interest rates cannot be ruled out. The Assocham report referring to differential between Equated Monthly Installments (EMI), prevailing at 7% and 12%, says that approximate change in EMI for home loan of Rs 10 lakh works out to be Rs 3,250 and puts an extra burden of Rs 39,000 per annum on borrowers. Similarly, on a Rs 20 lakh loan, approximate change in EMIs due to interest rate hike from 7% to 12% works out to be Rs 6,520 and costs the borrower an additional burden of Rs 78,240 per annum.

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