RBI keeps lending rates unchanged: Its impact on real estate

The Reserve Bank of India has no immediate plans to reduce interest rates and this does have a bearing on the property market in India, as lower interest rates on housing loans can lead to positive triggers, including more demand from buyers, lower loan rates and more purchasing power, apart from lower taxes. However, the RBI does plan to cut interest rates soon, so there are no immediate worries, even though the real estate sector in India, as represented by apex body for realtors in India, the Confederation of Real Estate Developers’ Association of India (CREDAI) has been vocally disappointed by the RBI’s unchanged interest rates, saying that this could weaken the industry, causing problems for buyers, sellers and developers. CREDAI maintains that despite the fact that inflation has slowed down, a stimulus package is in order, as input costs have risen in comparison to the demand, which is especially low among buyers from mid-income segments and budget houses. Also, consumer inflation is still at a higher level and is putting pressure on the rupee.

Demand in this industry is dominated by the residential property segment and market forces that drive the industry include not just the price of properties and income levels, but also the interest rates and prevailing economic conditions and government policies that support lower loan rates and more access to formal credit. .

According to real estate developers in India, the RBI’s status quo on interest rate policies, while seen as a measure of caution, could stagnate the industry. The weak GDP in the September quarter of FY14, they say, could have used a stimulus package or a policy change to create confidence among buyers, thereby seizing opportunities and overcoming short-term challenges, instead of postponing growth to the next year.

However, many industry experts remain fairly positive, as the RBI is expected to cut interest rates in its next review and that it is up to commercial banks to step in and facilitate an increase in demand for buying apartments, given the favourable market conditions, including the reduce in inflation and positive economic signs, including increase in foreign inflow.

The government has also relaxed rules on FDI in the construction sector. The minimum floor area has been reduced from 50,000 sq mt. to 20,000 sq. mt. and the minimum capital requirement has been reduced from USD 10 million to USD 5 million.

Realty firms and consultants

Many realty firms and consultants seem fairly positive on the RBI’s move to maintain the same repo rate, which is the rate at which the RBI lends money to commercial banks when there is a dearth of funds. CREDAI President, C Shekar Reddy has pointed out that there are a lot expectations from the realty sector to decrease interest rates. Rajeev Talwar, group executive director, DLF, which is India’s largest realty firm, has expressed similar concerns, adding that the sector will remain stagnant until then.

Ways in which lower interest rate will impact the real estate industry

• It will facilitate cheaper loans for mid-income home buyers and buyers who are looking for low cost homes. This in turn will help stakeholders and companies in the real estate industry, bringing in a positive momentum to the housing sector.
• The real estate contributes to over 10% of the country’s GDP and to give a positive boost to this industry will create a positive effect on other industries and accelerate overall growth.
• A reduction in rates will give confidence to buyers by reducing EMIs and making it easier to purchase affordable property

The RBI has kept the rate unchanged for the fifth successive time. This means that home loans will not become cheaper anytime soon. While not denying the importance of keeping inflation under control, industry pundits say that a rate cut will induce positive sentiment among buyers and developers. The RBI, however, is cautious and has suggested a gradual reduction of interest rates.