Affordability of residential real estate improves dramatically
Home loans from top banks are at the bottom. Kotak Mahindra Bank has the lowest interest 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%.
Real estate advisors and lenders point out that incomes have grown faster than house prices for at least the last decade.
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In this example, a 3% decrease in the interest rate allows a borrower to borrow 28% more
According to a research report from brokerage firm Jefferies India Pvt. Ltd, property prices have had an average annual growth rate of 1% to 2% since 2013, well below inflation, and also show declining income growth.
“With the exception of a few pockets, property prices have stagnated since fiscal 2013 when volume began to decline. Over the same period, we’ve seen average income growth of 8% to 10% annually, “said Piyush Bothra, co-founder and CFO of Square Yards, a real estate portal for buying, selling and renting.
When home loans fall 100 basis points, they are as effective as a 5% cut in price from a home loan affordability or servicing standpoint. At the beginning of January 2020 they were around 8%.
Let’s look at how falling interest rates affect a home buyer.
Affordability has increased
HDFC Ltd tracks affordability based on customer profile, property prices and other incentives available to a buyer, including tax deduction.
In the 2000 financial year, real estate prices averaged 5.9 times the annual income of a buyer. In the 2020 financial year, the price of property purchased by one person averaged 3.3 times the annual income.
Home buying affordability is increasing among the seven largest metropolitan areas, according to JLL India.
Cities include Mumbai, Delhi NCR (National Capital Region), Bengaluru, Chennai, Pune, Hyderabad and Kolkata. Calcutta has the best affordability, followed by Hyderabad. Mumbai was at the bottom of the seven subways.
WHAT CONVENIENCE MEANS FOR BUYERS
As affordability increases, you can use your current income to buy a larger property. The interest rates on home loans have fallen by 1.2 to 1.3 percentage points compared to the previous year alone.
For example, suppose a buyer earns £1 lakh net salary per month. He / she takes out a loan for 20 years. At an interest rate of 8%, the buyer could get a loan up to £59.78 lakh. For example, at current rates of 6.7%, he / she can get an additional one £6.24 lakh loan.
If the loan amount is the same, your monthly expense will be significantly reduced. Suppose a borrower wants to avail one £50 lakh loan for 20 years. An interest rate differential of 1.3 percentage points can lower the equivalent monthly rate (EMI). A borrower would pay an EMI from £37,870 at 6.7%, while the monthly outgo turns out to be high £41,822 at 8%.
However, the home loan interest rates are only part of the affordability.
“In the latest consumer sentiment survey, we found that attractive offers from developers are the main driver of demand for housing (for at least 36% of respondents). The availability of cheaper credit was the second factor in the decision to buy real estate (for 25% of respondents), “said Anuj Puri, chairman of Anarock Property Consultancies.
SHOULD YOU BUY A HOUSE NOW?
Because of the greater affordability, many people have already started buying houses. “There are many first-time buyers among those buying real estate. A part are also those who consider larger houses. Working from home has made many realize that they need a separate work area in the home, “said Raoul Kapoor, COO of Andromeda, a loan broker with various banks.
While affordability is best for the average buyer, there is no right time to buy a home for consumption – where the buyer will live. If you have planned on buying one, go for it. But do not rush to buy a home just because the loans and prices are attractive.
The best thing to do is to plan a big purchase at home. You have to contribute around 20% of the purchase price, even if you plan to finance it.
For those looking to invest in real estate, most experts advise against it.
“There won’t be a dramatic price spike anytime soon for investors to get into the residential real estate market,” said Bothra.
Puri added, “Investors with the cash can consider expanding their portfolio to include other options such as real estate investment trusts (Reits) that offer a good return on investment. Reits is seen as a stable income generator, especially as it is driven by strong demand and occupancy in the Indian Class A office market, which is further supported by leasing commitments from large companies. “
So buy a home if you want to stay in it, not for investment.
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