Monday, December 08, 2008

Home Loans to be locked in for 5 years at 9.5%

It looks like Indian bankers are yet to learn from the wave of option ARM defaults hitting the US home-owner. If the text of the press release is to be believed the bankers will be lending upto 20L for 9.5% for a period of 5 years until the loan resets to the market rate. In today's enviroment the publicly listed builders need the middle income earning to buy housing and the only way they can get that to happen is to pressurize banks to lower lending rates.

As expected builders will now price homes at 25L white and everything above as black. If one things this will bring relief to the common home buyer they are in for a rude shock. Another trick the builders do is build jodi flats, i.e. flats which meet the middle income criteria but are adjacent to each other so that they can be combined by the high income purchaser. reports
Mumbai: Public sector banks (PSBs) are set to offer home loans of up to Rs20 lakh at a concessional rate of 9.5% for a period of five years as part of the government’s fiscal stimulus package announced on Sunday to spur spending and bolster sagging economic growth.
All new home loans advanced by state-owned banks until 30 June will come at the 9.5% rate, which will be reset five years later depending on the prevailing trend, according to two senior bankers involved in devising the package who didn’t want to be named.
A formal announcement of the scheme will be made soon by public sector banks. Two officials at two different ministries, who also didn’t want to be named, confirmed the plan.
Housing is one of the key areas on which the government is focusing to lift economic growth that’s slowing from an average annual pace of 8.9% in the past four years. Lower interest rates prop up the demand for homes, which in turn, creates demand for steel and cement and generates jobs in the construction sector.
Banks and housing finance firms are now charging between 12% and 14% for fixed-rate home loans and offering floating-rate mortgages at between 9.5% and 11.75%.
Because the cost of funds for banks currently is higher than the rate at which they will offer loans under the new scheme, the government may work out an arrangement to compensate the lenders, analysts say.
It is not clear what will be the nature of the arrangement but “certainly not subvention”, said one banker. The government offers 3% subvention—or interest subsidy—on small agricultural loans, which are given at a concessional rate of 7%.
The Reserve Bank of India’s (RBI) decision on Saturday to include home loans of up to Rs20 lakh in so-called priority sector lending—targeted at segments such as agriculture, small industry and education—will come in handy for banks to offer mortgages at a concessional rate.
Under banking industry guidelines, 40% of advances are meant to be channelled to the priority sector. Banks that are not able to meet the target are required to park the shortfall with the National Bank for Agriculture and Rural Development at a low interest rate. The money is used for rural infrastructure projects. Analysts say the five-year fixed rate of 9.5% will dent banks’ profitability if the government doesn’t offer a support plan for lenders in case interest rates remain at this level or rise further. But if interest rates drop, consumers will lose out on the benefit of falling rates.
“If interest rates fall and home loan rates come down below 9.5%, we will have to watch what exit options this package would provide. Many questions of potential borrowers might have to be answered before they go ahead and avail of such loans,” said Ravi Sankar, a banking analyst at Antique Stock Broking Ltd, a Mumbai-based brokerage.
The asset quality of banks might be compromised if they try to push the scheme aggressively, Sankar said.
“This rate is quite attractive for borrowers at the moment,” said Hatim Brochwala, an analyst at Khandwala Securities Ltd, another domestic brokerage. “However, if interest rates fall and home loan rates become cheaper, borrowers might start complaining. So, the banks will have to chalk out an exit plan. Converting fixed rate into floating rate (loans) may not be a good option as the penalty is heavy.”
Analysts are betting that interest rates will come down by 300 basis points in two years and home loan rates will be cheaper than 9.5%. One basis point is one-hundredth of a percentage point.

On Saturday, the RBI announced a special refinancing package of Rs4,000 crore to the National Housing Bank, which regulates housing finance firms, to help prop up the home loan market. Analysts say the refinancing facility is too small.
Housing Development Finance Corp. Ltd (HDFC), India’s oldest mortgage firm, has a disbursal target of about Rs45,000 crore this year. While HDFC accounts for at least 40% of the housing loan market, public sector banks make up about 20%, limiting the scope of the stimulus package, analysts say. ICICI Bank Ltd, India’s largest private sector bank, is a prominent lender in the mortgage market.

Delhi flat owners re-sell in down mood

Gaurav Jha, Hindustan Times reports

With property values falling, frenzied property owners in Delhi NCR (National Capital Region) now seem to be in a selling wave, fearing further fall in the prices of their property.

Businessman Rahul Gupta is in a hurry to sell his three-bedroom flat in the Faridabad area for Rs 32 lakh, Rs. 50,000 below the amount he paid nearly a year ago. In Delhi, it is unsual for a property to be sold at a price less than the purchase price.

“I am in urgent need of money and the prices are crashing. I may not get this amount after a month. I don’t know when the market will revive,” Gupta told Hindustan Times.

“It is just a seller’s market, not buyer’s” said U.K.Bhardwaj, founder-president of the Delhi Property Deaders Association.

Sajoy Mittra, a retired bank employee, has been trying in vain to sell his three-bedroom Gaur Green apartments at Indirapuram across the Delhi border near Ghaziabad (Uttar Pradesh) for Rs. 72 lakh for the past two months.

Unlike Gupta, he is however hopeful. “I feel the laid off employees and NRIs (non-residential Indians) in the West will buy my home after coming back to India”

However, the brokers have a different take. They are not much optimistic of the market.

“There are only sellers in the market, no buyers”, said Pradeep Mishra, a broker who has operations across NCR. “For every single buyer, the market has at least five-six sellers” he added.

“The market has only 10 percent buyers, while 50 percent have disappeared because of the economic slowdown while remaining 40 percent are waiting for the prices to decline,” Mishra said.

“This is happening all over. RBI’s announcement of cuts in repo and reverse repo rate (signal interest rates) is a welcome move. But until we don’t get a rate of 7-8 percent on home loans, buyers will not have confidence in the market,” said Sanchin Sandhir, managing director at property consultancy firm RICS, told Hindustan Times.