Rising home loan rates: A realty risk

by : Propertiesmls

The real estate market in the National Capital Region (NCR) of Delhi could be a risky proposition for investors not intending to hold the property for long. Many consultants and builders feel that the real estate prices have almost peaked and it would be difficult for investors to make money in a short span of time. However, investors can shift their attention to smaller towns, where the property prices have not spurted.

Consultants suggest that small investors should not enter the realty market at the present level, as the chances of loosing money from here is high.

A senior consultant with a global consultancy firm India Property Research, Tanaji Chakraborty, said that property prices have gone into the hot zone and it would be advisable to the short and medium term investors to desist from entering the market. Even long investors, he added, should not expect the same return, which they earned in the last two years.

The property prices have gone up by more than 100% in the last two years. Investors hold the property, with rising prices, in the expectation of better returns. Now, the prices are not going to witness the similar rise in the short to medium term. This might disturb the balance as many investors may decide to sell to book profit. Many consultants and builders feel that this would lead to increase in the supply. This, he felt, could lead to a kind of correction in the prices.

Getamber Anand, one of the promoter directors of ATS Infrastructure, a medium sized developer, also accepted that the prices in NCR have risen substantially and there could be some correction. The general perception among the consultants and builders is that if the prices do not go for a correction it would remain stagnant around the present level for some time.

Global consultancy firm, Cushman and Wakefiled, in its outlook for 2006 said that the speculative short term activity would see a significant decline, with investors increasingly taking more informed decisions rather than following the herd mentality.

The real estate prices in suburbs like Pitampura, Rohini, Patparganj, Mayur Vihar, Dwarka and Paschim Vihar are ruling at around Rs 3,000 per square feet. Even for satellite cities like Noida, Gurgaon and Indirapuram, which are around 15 km to 30 km from central locations like Connaught Place in Delhi, the price of apartments are in the range of Rs 2,700 to Rs 3,500 per square feet. That means, a two-bedroom flats on 1000 sq feet is available at around Rs 30 lakhs and a three-bedroom flat on 1,400 sq ft is quoting at upward of Rs 40,000. One to two years earlier, the same flats were available in less than half the prices mentioned.

In fact, the gains earned by the investors on their investment in these flats are huge. As most of the investors have bought flats or landed property on loan.

Suppose, an investor bought a property for Rs 25 lakhs two years back on loan. His total investment including the cash down payment (the upfront contribution that a buyer has to make to secure loan, which is around 10% of the flat's cost) is around Rs 8 lakh till now. The outstanding loan amount on his loan would be in the range of Rs 21 lakh. The flat that cost him around Rs 25 lakh two years back, is commanding around Rs 50 lakh today. That means, if he sells the flat today, he can earn around Rs 21 lakh after repaying all the loan to banks on his investment of Rs 8 lakh.

But, similar gain is not possible in the short to medium term. In fact, consultants feel that another hike in the interest rate on home loan could be a trigger point. The steep rise in the property prices in the last two years was also because of the fall in the home loan rates to 7-7 .5% per annum from over 10% per annum in 2002. The fall in the interest rate triggered the demand for the real estate in the country.

Short term is dangerous

Property price is touching an all time high Rise in interest rates affects demand Another hike in the interest rate may trigger correction in property price.

Similarly, Tanaji Chankraborty said, that rise in the interest rate to around 10% will affect the demand drastically. The interest rate on the floating home loan rate has already gone up to 8.5% to 8.75%. if the rate is increased by another half a percentage point, it would cross the 9% level.

Till now, the increase in the rate has not affected the monthly instalments. Instead, banks have increased the repayment period, keeping the monthly instalment the same. But, the two percentage point rise in the interest rate from 7 to 9%, the 20 years loan repayment period has to increase to 39 years if the monthly instalment has to be kept at the old level. If the interest rate rises by another one percentage point to 10%, the monthly instalment has to be increased. In this situation, consultant and the banker said that many investors would be forced to sell their holdings.

This, a senior consultant argued will increase the supply which would trigger a price correction. Therefore, consultants feel small investors should desist from entering the property market at the present level.