RBI stance keeps affordability going in residential real estate
The RBI’s accommodative price policy has kept homebuyers active in the market. As low interest rates increase affordability for buyers, lenders are pushing developers to complete projects at any cost and get stock in the market. Buyers continue to search for complete or near-complete homes which are significantly larger than earlier. Old investments in land are now translating into new launches. E Jayashree Kurup analyses the result of the new monetary push.
When the Reserve Bank of India kept the home loan interest rates unchanged in early October, it was widely appreciated by the industry. After a hiatus of over five years, the post-pandemic demand had just brought the industry out of its slumber.
The RBI’s accommodative price policy has kept homebuyers active in the market. As low interest rates increase affordability for buyers, lenders are pushing developers to complete projects at any cost and get stock in the market. Buyers continue to search for complete or near-complete homes which are significantly larger than earlier. Old investments in land are now translating into new launches. E Jayashree Kurup analyses the result of the new monetary push.When the Reserve Bank of India kept the home loan interest rates unchanged in early October, it was widely appreciated by the industry. After a hiatus of over five years, the post-pandemic demand had just brought the industry out of its slumber. Prices were about the same as five years ago or even less. State governments like Maharashtra had bitten the bullet and waived or reduced stamp duty across the board for a limited period of time. This pushed the reluctant fence-sitters to centre stage to avail the significant reduction in payouts. Combined with the large bank of completed unsold inventory, end users were in a position to cherry pick from the existing stock.So, what has the latest announcement of holding interest rates for the time being, by the central bank, done for the sector? Industry experts believe that the biggest achievement is to hold on to affordability.Renu Sud Karnad, Managing Director, HDFC Bank, tells Construction World, “Housing today is much more affordable than it ever was. In the last couple of years, property prices have more or less remained the same across the country while income levels have gone up. The government has also been very focused on the housing sector through the Pradhan Mantri Awas Yojana (PMAY). The concession in stamp duty by the Maharashtra Government last year also helped.Work from Home, Education from Home and Entertainment from Home due to the pandemic has also made people realise the need for additional space at home.So, the combination of factors viz., favourable demographics, improved affordability, lowest ever interest rates on home loans in India are pushing the demand for home loans.”Pankaj Kapoor of Liases Foras has an empirical formula to compute how much affordability comes with each drop in housing finance interest rates. “Every 0.5% drop in interest rate impacts demand by about 6.25-6.5%,” he says. As the actual home loan interest rate has dropped by about 3%, the eligibility for a larger loan too has gone up. As a result, consumers have greater access to finance and can consider buying bigger homes.The Maharashtra drop in stamp duty for a limited period of time allowed developers to liquidate inventory across the board. This start of the virtuous cycle also coincided with developers offering incentives over and above the lender’s push. “This cycle of buying has brought more money into the developer’s kitty as the EMIs have started flowing, and they have enough money to extend credit to suppliers,” says Kapoor.“Many of the joint ventures that are taking place on the ground are driven by lenders pushing the developers they have lent to in the past, to consolidate and sell stock. Groups like Sobha and Prestige with good track records are now taking up projects and completing and selling stock. More stock means rational pricing. With plenty of demand for completed stock and developers with the means to complete are stepping in to finish and put units on the market, it is a win-win for developers and consumers. And unlike earlier, it is not the developer booking hefty projects when the buyers get active. “A builder books revenue on construction. There is a big drop in performance as revenue books have taken about a 40% decline,” Kapoor explains.So, what has the accommodative stance of the RBI achieved? It has ensured that urban India continues buying. Stress to developers has converted to more stock. The mantra has been to reduce standing stock and inventory and get the cash cycle moving. Kapoor calls the current buying cycle ‘volume driven and not price driven growth’.As cash flows back, developers have started launching fresh projects on historically purchased land. Rohan Khatau of Rivali Park project in Mumbai’s Borivali says the phases have become smaller and there is less risk-taking. Speed of construction and adherence to timelines are the drivers. Mivan technology to achieve speed and perfection in construction has now become the norm.With every developer in the country concentrating on construction, completion, liquidation and fresh launches, even large developers are under pressure from smaller competitors who offer lower prices in the same location. With RERA assurance of money being spent on the project and timely completion, new launches have become a norm. According to the Knight Frank India Real Estate July-September 2021 report, “New launches have grown at a brisk 90% YoY during Q3 2021 with all markets showing a healthy growth in supply. As with sales, the units launched in Q3 2021 exceeded the 2019 pre-pandemic quarterly average by 6%.”Many incentives have completed their tenure. A few are still on. The interest rates are still competitive. There is still fresh stock in the market. The Covid scare too is not over yet. Consumers are mostly in the buying mode and are looking for bigger and better deals. The volume of new launches shows that developers are banking on this optimism continuing. This festive season may yet turn out to be one of the biggest.E Jayashree Kurup is Director, Wordmeister Editorial Services, Real estate & Cities. She can be reached at email@example.com