Real estate prices may fall by 10-20 %

IF YOU are planning to buy a house, it might make sense to postpone the move by a few months. Property consultants in the City expect the real estate prices to fall by 10 to 20 per cent in the coming months due to lean demand following the hike in home loan interest rates among other factors.

Over the past three years, interest rates have gone up on five occasions. From an average 7.5 per cent in 2004, the rates have touched 10 per cent in February 2007. Real estate prices, meanwhile, have increased by 30-40 per cent in prime locations of the City over the last two years.

Says property consultant Prahaladdas Porwal, “I expect a 10-15 per cent correction this year. Besides the rising home loan rates, NRI money has also started to move out. The (agriculture land) prices have already come down in the surrounding areas like Bada Bangarda by Rs 50,000 per bigha (17,600 sq ft) in the last few months.”

The floating home loan rates are now ruling in 9.5-10 per cent range following the recent hike by private sector banks. Bankers feel that public sector banks too will be forced to hike the home loan rates from April 2007 following the Reserve Bank of India’s 0.5 per cent Cash Reserve Ratio (CRR) hike on February 13.

A senior State Bank of India official, who requested anonymity, said PSU banks are unlikely to hike rates until March end but may be forced to review their position in the next financial year.

But rising home loan rates, feel property consultants, will only lead to a steeper fall in prices. Says property consultant G D Biyani, “Prices seemed to have peaked and could fall by 10 to 20 per cent in the coming months. Rising home loan rates will only contribute to this fall.”

A section of property consultants, however, feel that hike in home loan rates might not lead to demand slack. Says property consultant Jitendra Singh Chouhan, “While the prices may have peaked, I do not think the hike in home loan rates would have any major impact because once a person decides to buy a property he just goes ahead irrespective of the interest rates.”

For those who have already availed floating loan, the EMI has now gone up by almost 25 per cent since 2004. So does it make sense to switch to fixed loan?

No, say bankers. This would invoke a ‘switch charge’ of around 1.5 per cent of the outstanding amount. Besides, the fixed rate is always 1 to 1.5 percentage points higher than the prevailing floating rate. While the floating rate is at 10 per cent, the fixed rate is 11.5 to 12 per cent.

Also, if interest rates come down in future, those who switch would be stuck with the higher fixed rate. And most banks also reset the fixed loan every 2 to 3 years as per the prevailing interest regime.

Bankers feel that interest rates may fall in medium term if the government manages to rein in inflation. Either way, all those wanting to purchase a house now might be better off postponing the purchase by another few months.