RBI's big rate cut won't spur housing market

Prospective home buyers in India are unlikely to even blink, let alone give a thought, to hinging their purchase decision on the 50 basis points (bps) rate cut announced by the Reserve Bank of India on Thursday.

The cut translates to a 3.2% decrease in a homebuyer's equated monthly installment (EMI), which isn't motivation enough to turn people from squirrels to squanderers. Besides, the rate easing comes after a 375 bps increase between March, 2010 and October, 2011.

If that kind of a rise did not deter those who wanted to build their own nests from putting down the money for a home, this cut isn't going to spur demand either.

That's because purchasing a home is the biggest investment by far for most people in India and the loan taken for that will be exposed to various interest rate regimes over the 15- or 20-year period that the loan is repaid.

So a rate cut now with the prospect of an increase again as soon as inflation rises makes it unwise for buyers to take a bet on this.

The Real Effect

Not many buyers may think in these terms - but taking a loan because interest rates have fallen in anticipation of lower inflation makes no sense. High inflation erodes the real burden of debt. If inflation keeps declining over the years, mortgage payments will be higher in real terms.

Evidence of the lack of linkage between interest rates and housing demand is in the March 2012 sales registrations figures in Mumbai. They were down just 1% at 5,776 on a year-on-year basis, whilst increasing 37% month-on-month, according to figures provided by equities brokerage Prabhudas Lilladher.

"It may not have any major impact since interest rates are still very high," says MR Jaishankar, chairman of Bangalore-based developer, Brigade Enterprises. "Home loan seekers would like to see their EMI's coming down to Rs 1,000 per Rs 1 lakh for a 15-year loan," he says.

The Young Ones

Mortgage payments are among the last considerations, especially among the biggest group of homebuyers in India at present - the 25 to 35-year age-group segment. Those are people with high aspirations, stoke a fire in the belly with peak calorific content and expect to repay their loans much before maturity.

The primary concern of homebuyers is affordability and the assurance of it being built and delivered on time. India's five most-promising cities - Mumbai, Delhi, Chennai, Bangalore and Pune are failing fast on this front with city-centre and suburban prices going beyond the reach of even people with a monthly income of Rs 50,000, if they have no monetary support from the family.

In Mumbai, for instance, the most number of apartment purchases in the past year have been between Bhayandar and Naigaon - at a distance of 75 km from Churchgate station. The distance doesn't matter because these extended suburbs are connected to the city by the electric suburban train network.

To underscore the sheer pace of construction that is catering to booming demand here, just look at the numbers of one developer out of close to a hundred operating in that region.

Rashmi Developers Pvt Ltd, which started 10 years ago, has till now built 2.5 million sq ft in 220 buildings. During this period, they delivered 7,000 flats, which means they completed close to two homes each day.

Rashmi's director, Yogesh Bosmiya, says the company currently has 1.5 million sq ft under development and expects to increase its building pace to 2.5 apartments each day.

Big Funds

India's real estate industry has changed dramatically since 2005 when Press Note Two allowed global private equity funds to invest in the country. There are billions of dollars raised overseas and committed to investments in the sector in India.

Currently, there are close to 100 overseas and domestic funds that are scouring the market to inject money into residential and commercial projects. The numbers of just one private equity fund gives an idea of the quantum of money available for investments in Indian real estate.

JP Morgan's Global Real Assets division exhausted its first India-focused fund of $360 million last year. Currently, it is in the process of raising a second fund of $500 million and has already received commitments for about half of it.

The changes in the sector are also evident in the type of players entering the industry - Tata, Godrej, Wadias and former banker Jerry Rao.

Suitcase Problem

Still there are problems and they can't be fixed by interest rates or economic reform. It requires changing India's political funding system. Politicians receive cash in suitcases that they can't deposit in banks.

Real estate is a business where you need such gilded suitcases - not for the real wealth-creating activity of constructing an asset and delivering it to customers. It's needed only to buy land and to get approvals to build. As is widely known by many, but never been backed by evidence, some of India's most astute politicians have major stakes in land.

As for approvals, there are dozens to be sought and they vary from state to state, allowing for discretion in refusing them - once again the domain of politicians.

Puncture the artificially propped-up cost of land and approvals and real estate will become an asset class in India that generates more business volumes than equities, foreign exchange and commodities put together.

The writer, a former journalist, is founder of Realmark, a financial intermediary that advises global private equity funds on real estate.

Source: EconomicTimes