Following the RBI’s signal in its quarterly policy to soften the interest rate regime on Wednesday, and the coming into force of a RERA in every state and UT, buying a house is going to be cheaper, and safer, now on.
Is it the right time to buy?
1. Property prices have fallen by over around 15-20% from the peak rates of 2013-2014, when the home loan interest rate was at 10.5-11%. Adjusting fall in prices and interest rates, down to around 8.40% in the last three years, the net price fall is over 30%.
2. The price at which a flat is available now in the market is lower than even the replacement cost.
3. Because of this, launches of new projects in the first half of 2017 declined to around a quarter of that in first half of 2016. For last one year, till June 2017, new launches have declined to less than one third of that in the preceding year, as shown in the chart.
4. The chances of further price reduction of real estate from this level are very slim, says Samantak Das, chief economist of Knight Frank.
5. Waiting for prices to fall further could be risky, as the shortage in supply may start pushing prices up.
What about interest rates?
Interest rates, especially home loan rates, are set to fall further in the next couple of years.
Home loan rates have already fallen by around three percentage points in the last five years.
Since 2014, only home loan rates have fallen-by over 2 percentage points, to 8.40%. Thus, EMI on 20-year loan is down by 19.5% since 2012, and down by 14% since 2014.
Why rates may dip further:
1.RBI cut the policy rate by a quarter of a per ht Frank centage point, indicating the direction of interest rates to follow in the near future.
2. The banking sys tem is saddled with surplus liquidity. To tal deposits with the banks in the last one year increased by Rs 10,32,900 crore–by the last week of July–against Rs 7,89,580 crore in the same period the preceding year. But banks lent only Rs 4,40,500 crore this year, against Rs 6,22,340 crore last year. Because of this, banks have to park surplus funds with RBI at very low rate.
3. Banks like SBI have cut the savings rate to 3.5%, from 4%. Other banks will also follow suit.This will reduce the cost of funds.
4. Besides lowering policy rates, RBI has also asked banks to pass on the benefit to bowers by reducing lending rates.
5. As the home loan segment has the lowest default rates, banks are more inclined to lower home loan rates and lend aggressively to deploy their funds.
6. With RERA in place, banks are more confident in lending against a project under construction.
7. Borrow at adjustable interest rates, so that you can take the benefit of any fall in interest rate in future.