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The Rediff Business Special/Nikhil Faleiro

Low housing finance interest rates excite the common man

Part I: Housing sector breathes free as interest rates are pared

With housing finance interest rates touching new lows, the common man stands to benefit the most. "Homes are much more affordable today. They are within our reach, to the extent that we do not have make big sacrifices to buy a house," says Shabnam Ladliwala, 28, whose husband is working with a multinational company in Maharashtra.

"We are also witnessing a change in the perception of the buyer. The decline in interest rates not the only driving force. The sizeable tax incentives is yet another significant factor," says K L Majumdar, deputy general manager, State Bank of India Home Finance.

The finance ministry has increased the deduction for interest on housing loans under Section 24(1)(vi) from Rs 30,000 to Rs 75,000, where the borrower can get a tax saving of up to Rs 25,000 per annum. This has made the prospective buyers happy, because the higher the tax break gives them the facility of borrowing without denying themselves many certain due to high equated monthly instalments or EMIs.

Says a gleeful advertising executive Maya Shastri, " I am getting a rebate on the interest amount, as also a tax incentive. So I benefit on two counts. This has induced me to go in for an apartment."

With more funds being made available, construction houses are also gearing up to meet the increase in demand for accommodation.

For instance, take Irfan Razack, managing partner of Bangalore's Prestige Properties. A smile is lighting up his face after a very long time. There is reason for his joy: his 167-room Greenwood complex, situated nine kilometres from Bangalore's posh M G Road, has been fully sold out in three months flat. A situation totally unthinkable two years ago.

At Rs 1.9 million, the 1500 square feet, three-bedroom flats are far more expensive than the 900 square feet, two-bedroom apartments that cost Rs 1.1 million each. The fact that the more expensive flats have outsold the smaller ones has helped widen that smile.

"Investors are coming back. There is a renewed confidence. And this is the first ray of hope for the beleaguered industry,'' he says.

And his is not the only construction house celebrating the return of the elusive investor. On the other side of the Vindhyas, Niranjan Hiranandani is busy drawing up plans to construct another complex at Thane near Bombay.

"While the exact details of the project are being worked out, there is no denying the fact that there's a new buzz in the real estate market in Bombay," he informs.

The last two months have been especially heartening for him. He sold over 30 flats at his prestigious Hiranandani Powai Lake complex.

Visit any of Bombay's housing finance companies and one can feel the excitement in the air. More and more prospective buyers come in and enquire about loans, interest rates, EMIs, etc.

Ashish Modgaonkar, a 32-year-old engineer, is weighing the various options available to him. For once, he is smiling as he does not have to restrict his choice to a small, dingy apartment. Today, with low interest rates, he can go in for a better apartment. Today, the customer has turned the tables on the market forces: rather than being dictated by them, it is he who is calling the shots.

"Now, with the reduced rates, I can use the money saved by me to buy a bigger flat. The dream house is no longer a dream," he says.

According to Akshay Kumar, CEO Colliers Jardine, "Prices have 'corrected' during the last three years. Today, they are more realistic and the signs of revival are everywhere to be seen. With the budget being extremely friendly, the market is expected to grow once again."

So what has contributed this decline in prices? Opines Sunil Bajaj, real estate consultant, "Prices have declined by as much as 40 per cent since early 1990s. Housing finance is much cheaper. And the shift of people from the city to the suburbs has been the other important factor influencing the prices."

Consider some of the areas in the country that have witnessed a massive shift in the prices of residential premises:

• In Bombay, prices in Goregaon, a suburb, have fallen from Rs 3,500 per square feet in 1995 to Rs 1,800 per sq ft. In the elite localities of South Bombay, prices have crashed from Rs 22,000 per sq ft to Rs 14, 000 per sq ft.
• Prices at Bangalore's Indiranagar have also declined from Rs 2200 per sq ft in 1995 to Rs 1,200 per sq ft. At M G Road, rates have dipped from Rs 4,500 per sq ft to Rs 3,000 per sq ft.
• In Delhi prices have declined at Central Park from Rs 8,000 per sq ft to Rs 6,750 per sq ft. In upmarket Vasant Vihar, the decline has been from Rs 4,000 per sq ft to Rs 2,800 per sq ft.
• In Calcutta, too, prices have slipped from a high of Rs 2,700 per sq ft to Rs 2200 per sq ft.

With prices bottoming out, it is not surprising that buyers are slowly coming back into the market. Says Ram Doshi, technician working at Nehru Science Centre, "Even with my meagre salary, I am optimistic of owning a flat."

According to HDFC, for the nine-month period from April 1 to December 31, 1999 loan disbursements amounted to Rs 22.75 billion, as compared to Rs 17.15 billion in the previous corresponding period: a rise of 33 per cent.

With 45,000 borrowers approaching HDFC as compared to 39,000 last year, the housing finance company is witnessing an increase in the loan size, which has risen Rs 2,30,000 in 1988 to Rs 2,50,000 this year.

LIC Housing Finance, too, recorded a 27 per cent growth in disbursements from Rs 5.57 billion in 1997 to Rs 7,08 billion..

Similarly, HUDCO is anticipating a rapid increase in its loan applications and has set a target of Rs 20 billion for 1998-99 as compared to Rs 12.68 billion for 1997-98.

Richard Cromwell, senior manager Hong Kong and Shanghai Banking Corporation, says, "There is a desperate need in the market for home loans. With all the factors favouring the customer, the deluge is about to start."

The repealing of the Urban Land Ceiling Act too has spurred on the market. With the repealing of the Act, over 22 hectares of land will now be released which was lying vacant.

And with more land becoming available to the real estate industry, agents anticipate supply of flats to increase further. Says Harshad Vaghela, chairman of Labh Constructions, Ahmedabad, "Supply will certainly increase and the prices too will dip some more."

But many feel that much more needs to be done before the actual benefits percolate down to the consumer. Says Yogesh Kochar, chief manager business development of Delhi-based Unitech Builders, "Incidental charges such as cheaper registration, a reduction in stamp duty, and development of the infrastructure in the suburbs will go a long way in bringing the customers back to the market."

However, despite their negative outlook, Unitech has projected a business of Rs 10 billion in the next two years as compared to Rs 1 billion this year.

As April 1 draws nearer, the real estate industry is cautiously optimistic. But with stability and investor-confidence returning to the market, the dull days in the realty mart appear to be drawing to an end.

As Hiranandani puts it, "This industry is like an elephant. If you don't prod it, it will stay still. But when you do, it is very difficult to stop the juggernaut."

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