Home loans from top banks are at rock bottom. Kotak Mahindra Bank has the lowest rate at 6.65%. State Bank of India and ICICI Bank offer home loans starting at 6.70%. For HDFC Ltd, the lowest interest rate is 6.75%.
Property consultants and lenders point out that incomes have risen faster than real estate prices, at least in the past decade.
According to a research report from broking firm Jefferies India Pvt. Ltd, since 2013, property prices have shown a compounded annual growth rate of 1-2%, significantly below inflation, and are also trailing growth in income levels.
“Except for a few pockets, property prices have remained stagnant since financial year (FY) 2013 as volumes started declining. During the same period, we have seen an average income growth of 8-10% a year,” said Piyush Bothra, co-founder and CFO, Square Yards, a property portal for buying, selling and renting.
When home loans fall by 100 basis points, they are as effective as a 5% price cut from the affordability or home loan servicing perspective. They were around 8% at the beginning of January 2020.
Let’s look at how falling interest rates affect a home buyer.
AFFORDABILITYHAS GONE UP
HDFC Ltd tracks affordability based on the customer’s profile, property rates and other incentives available for a buyer, including tax deduction.
In FY2000, property prices, on an average, were 5.9 times the annual income of a buyer. In FY2020, the price of the property that a person purchased was on an average 3.3 times the annual income.
According to JLL India, home purchase affordability among the top seven metros is on the rise.
The cities include Mumbai, Delhi NCR (National Capital Region), Bengaluru, Chennai, Pune, Hyderabad and Kolkata. Kolkata has the best affordability, followed by Hyderabad. Mumbai was at the bottom among the seven metros.
WHAT AFFORDABILITY MEANS FOR BUYERS
With affordability rising, you can buy a bigger property with your current income. Home loan rates are down by about 1.2-1.3 percentage points compared to last year alone.
Assume a buyer earns, say, ₹1 lakh net salary a month. He/she takes a loan for 20 years. At 8% interest rates, the buyer could get a loan up to ₹59.78 lakh. At current rates of say 6.7%, he/she can get an additional ₹6.24 lakh loan.
If the loan amount is the same, your monthly outgo reduces considerably. Say, a borrower wants to avail a ₹50 lakh loan for 20 years. A 1.3 percentage point difference in interest rate can bring down the equated monthly instalment (EMI). A borrower would pay an EMI of ₹37,870 at 6.7% rates, whereas the monthly outgo works out to be ₹41,822 at 8% rates.
But home loan interest rates are just one part of affordability.
“In the latest consumer sentiment survey, we discovered that attractive deals offered by developers was the top factor driving housing demand (for at least 36% of the respondents). Availability of cheaper loans was the second factor in their property purchase (for 25% respondents) decision,” said Anuj Puri, chairman, Anarock Property Consultancies.
SHOULD YOU BUYA HOUSE NOW?
Due to better affordability, many people have already started buying homes. “Among those who are buying properties, many are first-time buyers. A portion is also those who are looking at bigger houses. Due to work from home, many have realized that they need separate working space in the house,” said Raoul Kapoor, COO, Andromeda, an intermediary for loans with different banks.
While affordability is at its best for an average buyer, there is no right time to buy a house for consumption—where the purchaser will reside. If you have been planning to buy one, go for it. But don’t rush to buy a house just because the loans and prices are attractive.
It’s best to plan for a big purchase like home. You will need to contribute around 20% of the purchase price even if you are planning to finance it.
For those looking to invest in property, most experts advise against it.
“There won’t be any dramatic increase in the prices any time soon for investors to start looking at the residential real estate market,” said Bothra.
Added Puri: “Investors with the financial wherewithal can consider expanding their portfolio into other options like real estate investment trusts (Reits), which are yielding a good return on investments. Reits are seen to be a stable income generator, especially since it is driven by strong demand and occupancies in India’s Grade A office market, further backed by lease commitments from big corporates.”
So, buy a house if you intend to stay in it, not for investment.