Source: Expressindia.com
Amrish Shah (name changed) is a “family man” and heavily into investments, real estate taking 50 per cent of his decision space. The year 2004, for Shah, 46, was what he called “the real Diwali” as he explains: “The home loans were at the lowest at 7.25 per cent, while the rental yields across the city had just begun their climb.” It made perfect sense for investors like Shah to join the realty bandwagon, and as the Mumbai skyline changed, so did Shah’s kitty.
Shah made 10 realty purchases, starting from Navi Mumbai to Kandivli and finally touched the central suburbs by early 2006. All these purchases were backed by home loans and tax benefits. This month, Shah has finally started exiting from his realty investments. Reason? As financial planner Amar Pandit from My Financial Planner says, “The fingers have started burning. The gulf between the rental yield and the soaring EMI has widened to an extent that it does not make sense.”
It is investors—or speculators who buy houses and later sell them to make a profit—like Shah who make for the 15 per cent of this realty market; and now they have started taking an exit route from the real estate market, “thanks to the phenomenon called rising interest rates”, says Pandit. In short, rentals have failed to keep pace with EMIs.
The rising interest rates are changing the calculations of home buyers, especially investors like Shah. Since the recent interest hike to 10.5 per cent, Pandit has been getting calls from investors like Shah, who, he says “were the people who are partly responsible in bringing the rates to these levels.”
Of course, like Pandit reveals, Shah who is now his client has locked interest rates for loans for five of his properties towards the end of 2006, before it escalated to current levels.
While not necessarily all of them availed loans to bite into the reality crust, the ones who did now have to move out due to the “less than viable option” in hand. Of course, the growth in interest rate, as banking firms put it, is due to other factors like the rising “cost of funds” following measures by the Reserve Bank of India and the government against inflation.
So who is the real gainer in a property market, where on the one hand property prices are escalating, along with rate of interest resting somewhere between 9.5 per cent and 10.5 per cent for floating loans, and in some cases at 11 per cent for fixed loans? Not the genuine buyer, for sure. Chartered accountant Deepak Tikekar from central Mumbai has been getting calls from his clients who he calls “the much-troubled middle class”.
Their concern, explains Tikekar, “stems from the not so recent phenomena of rate of interest in home loans which has only increased their outflows.” Very few banks offer the option of fixed rates, as they explain that “the pressure is too high” especially since the “fear of risk is phenomenal”. With the mutual funds and stocks giving anywhere between six per cent to 65 per cent rate of returns, says Nilesh Shah, chief investment officer of Prudential ICICI, buying a house in the long term as an investment option only makes sense if the rental yield from an appreciating capital is on the upward trend.
That is a different story, that Tikekar’s clients have started looking at Pune as a place to have a nameplate, since their earnings only permit those levels. He feels that with the market cooling off, the interest rates should also see some decline.
HDFC chairman Deepak Parekh says, globally, real estate prices rise and fall whereas here they have gone up but not come down. “In Japan, real estate remained depressed for 15 years and in the US, there has been a slowdown in recent months,” Parekh says, adding, “high prices cannot sustain for a long time.”
According to a spokesperson for HDFC, they have seen a growth rate between 25 and 30 per cent consistently, as most of their loan purchasers are the genuine home buyers for self occupation. “We do not see any slowing down in the rate, as the tax benefits that one gets of the loan have also improved over the years.”
So who benefits the most in the present scene? “The developer,” replies Pandit. But, not for long as prices will soon see a cooling. Parekh says high prices in the real estate sector and rising interest rates will see some investors exit the market. The dip is already visible in markets in Delhi and Bangalore, and Mumbai can’t be far behind.
Rising EMI
Two years ago at a floating rate of 7.25 per cent, a person availing a home loan for Rs 15 lakh for 20 years would have shelled an equated monthly installment (EMI) of Rs 11,856. Today, the same loan amount will pinch him more-as the EMI will work up to Rs 14,976 now. So how do you explain a jump of 26 per cent in EMI settlement in two years?
HDFC, the leading mortgage financer in the country says that "the cost of credit has gone up."
However, for middle class Mumbai with dreams of better housing this could mean a big jolt, considering eighty per cent of cost of a house is covered by housing loan in most of the cases. Also, the average loan amount is normally above Rs 15 lakh, as the houses no longer come cheap.
Amrish Shah (name changed) is a “family man” and heavily into investments, real estate taking 50 per cent of his decision space. The year 2004, for Shah, 46, was what he called “the real Diwali” as he explains: “The home loans were at the lowest at 7.25 per cent, while the rental yields across the city had just begun their climb.” It made perfect sense for investors like Shah to join the realty bandwagon, and as the Mumbai skyline changed, so did Shah’s kitty.
Shah made 10 realty purchases, starting from Navi Mumbai to Kandivli and finally touched the central suburbs by early 2006. All these purchases were backed by home loans and tax benefits. This month, Shah has finally started exiting from his realty investments. Reason? As financial planner Amar Pandit from My Financial Planner says, “The fingers have started burning. The gulf between the rental yield and the soaring EMI has widened to an extent that it does not make sense.”
It is investors—or speculators who buy houses and later sell them to make a profit—like Shah who make for the 15 per cent of this realty market; and now they have started taking an exit route from the real estate market, “thanks to the phenomenon called rising interest rates”, says Pandit. In short, rentals have failed to keep pace with EMIs.
The rising interest rates are changing the calculations of home buyers, especially investors like Shah. Since the recent interest hike to 10.5 per cent, Pandit has been getting calls from investors like Shah, who, he says “were the people who are partly responsible in bringing the rates to these levels.”
Of course, like Pandit reveals, Shah who is now his client has locked interest rates for loans for five of his properties towards the end of 2006, before it escalated to current levels.
While not necessarily all of them availed loans to bite into the reality crust, the ones who did now have to move out due to the “less than viable option” in hand. Of course, the growth in interest rate, as banking firms put it, is due to other factors like the rising “cost of funds” following measures by the Reserve Bank of India and the government against inflation.
So who is the real gainer in a property market, where on the one hand property prices are escalating, along with rate of interest resting somewhere between 9.5 per cent and 10.5 per cent for floating loans, and in some cases at 11 per cent for fixed loans? Not the genuine buyer, for sure. Chartered accountant Deepak Tikekar from central Mumbai has been getting calls from his clients who he calls “the much-troubled middle class”.
Their concern, explains Tikekar, “stems from the not so recent phenomena of rate of interest in home loans which has only increased their outflows.” Very few banks offer the option of fixed rates, as they explain that “the pressure is too high” especially since the “fear of risk is phenomenal”. With the mutual funds and stocks giving anywhere between six per cent to 65 per cent rate of returns, says Nilesh Shah, chief investment officer of Prudential ICICI, buying a house in the long term as an investment option only makes sense if the rental yield from an appreciating capital is on the upward trend.
That is a different story, that Tikekar’s clients have started looking at Pune as a place to have a nameplate, since their earnings only permit those levels. He feels that with the market cooling off, the interest rates should also see some decline.
HDFC chairman Deepak Parekh says, globally, real estate prices rise and fall whereas here they have gone up but not come down. “In Japan, real estate remained depressed for 15 years and in the US, there has been a slowdown in recent months,” Parekh says, adding, “high prices cannot sustain for a long time.”
According to a spokesperson for HDFC, they have seen a growth rate between 25 and 30 per cent consistently, as most of their loan purchasers are the genuine home buyers for self occupation. “We do not see any slowing down in the rate, as the tax benefits that one gets of the loan have also improved over the years.”
So who benefits the most in the present scene? “The developer,” replies Pandit. But, not for long as prices will soon see a cooling. Parekh says high prices in the real estate sector and rising interest rates will see some investors exit the market. The dip is already visible in markets in Delhi and Bangalore, and Mumbai can’t be far behind.
Rising EMI
Two years ago at a floating rate of 7.25 per cent, a person availing a home loan for Rs 15 lakh for 20 years would have shelled an equated monthly installment (EMI) of Rs 11,856. Today, the same loan amount will pinch him more-as the EMI will work up to Rs 14,976 now. So how do you explain a jump of 26 per cent in EMI settlement in two years?
HDFC, the leading mortgage financer in the country says that "the cost of credit has gone up."
However, for middle class Mumbai with dreams of better housing this could mean a big jolt, considering eighty per cent of cost of a house is covered by housing loan in most of the cases. Also, the average loan amount is normally above Rs 15 lakh, as the houses no longer come cheap.
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