Why interest rates on home loans in India will come down

The Indian real estate industry is passing through a transformation phase, and recent reforms introduced by the government will ensure transparency, protect the buyers, and bring down the cost on home loans in the near future, experts say.

They also noted that recent developments such as the passing of the Real Estate Regulation Act (Rera), GST and Real Estate Investment Trusts, demonetization, Goods and Service Tax, among others, combined with the government's focus on infrastructure will only serve as positive factors for the growth of the real estate industry in the country.

The industry players acknowledged a negative short-term impact of demonetizations over the industry, but expect a stable and mature market in the long run. They deemed it good for the industry in the long run and said that it will increase investor confidence in the India real estate market.

The real estate industry contributes around seven per cent to India's gross domestic product annually, and is the second biggest employer after agriculture. The Modi government gave special attention to the sector, and introduced various measures to put it on a growth path in years to come.

"Given the scale and size of the industry, it is imperative that we also understand a long-term impact on the industry. With the demonetizations move, banks are expected to have additional funds of almost Rs10 trillion. This will lead to a sharp fall in interest rates, which may be as high as up to 200 basis points. In a recent move from one of India's largest banks, the State Bank of India has cut deposit rates by 1.75 per cent," according to Shah.

Referring to Credai, an apex body of private real estate players in India, he said that the House Loan Interest may come down to less than seven per cent from its current rate of 9.25 per cent in the next one year or so.

"This would lead to lower EMIs; on the other hand there would be higher tax collection from the next financial year. In all, demonetizations would put more money into the pocket of the end consumer and incentivises them for home ownership."

Liquidity impact

Shah said that small and unorganized players [where more transaction recorded] may be impacted adversely due to the liquidity crunch, but it would be a short-term effect.

"With government's demonetisation move, banks have been flooded with funds and with Rera round the corner, developers will ensure better transparency in their dealings and this will lead to higher trust and banks will be ready to avail loans to real estate and infrastructure players in the interest range of 11-12 per cent. This will lead to the least number of issues for organized real estate brands as their sales velocity is being driven by housing finance."

"If Interest rate on fixed deposits is just five to six per cent then interest on home loans will come down to seven to eight per cent, since banks keep a margin of two to three per cent. Historically at such low interest rates, the real estate industry gets a massive boost as property becomes attractive to everyone," he said, adding that apartment rates come within reach of buyers due to lower EMI on loans.

"Investors find investing in property more attractive than earning a paltry five to six per cent on bank deposit, as simply buying and renting out gives them more return. In addition, they create an asset and earn appreciation over a period of time and they also get income tax deductions as well," he added.

Infrastructure development

That real estate prices show slower rise in countries which have a fully ready infrastructure like the US, UK and Japan, among others. Whereas in developing countries like India, there is a vast difference in prices in a city before and after creation of infrastructure, he said.

"The government will have money to invest in infrastructure as banks will deploy millions of rupees in government securities. With a few lakh crore at its disposal, the government can only boost funding to infrastructure schemes such as Smart City Mission, Swacch Bharat Mission, and Housing for All etc. New airport in town, better connectivity to national/state highway, upgrades in city transport all lead to an increase in demand and prices of properties in the city," he said.

Why demonetization is good for the real estate sector

More funds to boost infrastructure - Government will have more tax collection now and hence more funds which can be deployed to boost infrastructure including roads, highways, more numbers of smart cities, new airports, etc. This will help cities to grow their infrastructure and will eventually lead to an increase in demand, resulting to prices elevation especially for real estate.

Easing on home loan rates - The direct and most significant benefit of demonetization is increased liquidity across banks. Such availability of funds will lead to lowering the rate of interest across different loans, which will in turn reduce EMI, giving a boost to real estate demand. We expect home loan rates to be down to approximately seven to eight per cent.

One of the best investment options - Demonetization will lower interest rates on deposits as well, earnings are expected to be in the range of five to six per cent on deposits in short to medium term, and this will lead to better ROI from real estate investments in long term apart from getting tax benefit on home loans. Hence real estate will become the best investment option among all the asset class.

Housing demand is set to become higher - More and more people have been depositing their money in banks post the demonetization announcement, which means they will be eligible for home loans. With reduced home loan rates, demand for housing is here to increase and this will drive the pricing factor.

[Source: http://www.khaleejtimes.com/why-interest-rates-on-home-loans-in-india-will-come-down]