RBI's 'Diwali bonanza' stumps buyers, builders

Published: 26 October, 2011 00:01 IST | Varun Singh |

The .25 basis point hike in the repo rate will force banks to increase interest rates on home loans, further aggravating the current sales-crunch in the realty sector, spelling doom for all

The .25 basis point hike in the repo rate will force banks to increase interest rates on home loans, further aggravating the current sales-crunch in the realty sector, spelling doom for all

Diwali has always been considered as an auspicious and a good time by investors and builders alike. However, this festive season, it appears that the gloom cast over the property sales in Mumbai will continue. To make matters worse, the Reserve Bank of India's (RBI) latest hike in the repo rate by .25 basis point could spell doom for prospective buyers and builders. With the recent hike, the repo rate has now jumped to 8.50 per cent, which will eventually be forcing the banks to hike their respective interest rates on all forms of loans, primarily home loans.

Negative impact
A few days ago, at the inauguration of MCHI's 19th property exhibition, general manager of State Bank of India (SBI) had stated that the demand for home loans have decreased drastically.

According to Paras Gundecha, president of MCHI, the fresh hike in repo rate by RBI will cripple the real estate industry. He said, "Unfortunately, the latest hike will have a severe negative impact on the industry. As it is the realty sector is suffering the impact of hiked interest rates, and the latest one is only going to further discourage prospective buyers."

Dark days ahead
Babulal Varma, managing director of Omkar Realtors & Developers pvt ltd, claims that rising inflation, rise in interest rates and global economic slowdown has collectively taken a toll on the real estate sector. Any further rise in the interest rate would further aggravate the situation.

He said, "As per urbanisation report, there is a major shortage of apartments in urban India. In Mumbai alone, one can notice that there has been a 20 to 25 per cent decline in registration. Transactions have slowed down. A hike in interest rates increases the cost of capital for the developer and the buyer. Thus, the developer has to pass the extra burden on to the end user." Varma added, "When transaction slows down and the cost of capital increases, the developers have no choice, but postpone new projects. As real estate projects have a two to three years construction cycle, the impact of such policies have a long-term impact on the overall market scenario."

According to Lalit Kumar Jain, national president of Confederation of Real Estate Developers Associations of India (CREDAI), "As we have been saying, frequent rate hikes are counterproductive. Hence, the move will have a cost-push impact rather than proving to be an inflation control measure. The interest rates are bound to skyrocket and this will further weaken the already sluggish demand in realty sector."

Reacting to the RBI hike, Alok K Misra, CMD, Bank Of India, said, "RBI is well aware of the fact that the cumulative past policy actions are yet to play its full course. As such, today's rate hike is to be seen more as an exercise in managing inflationary expectations than curbing demand."

According to real estate experts, the hike would be equally affecting the new and upcoming projects. A spokesperson from Royal Institution of Chartered Surveyors, Economic research team said, "With the rate hike, the residential real estate sector is likely to remain relatively resilient in the face of more moderate pace of economic growth and higher cost of borrowing. However, there are a few signs that confidence, particularly amongst developers, may be slipping with a marginal drop in the number of new launches."

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