The Hindu Business Line : Have housing loan rates bottomed out?

IT would appear that housing loan rates have touched their floor. Home loan rates are currently hovering at around 7.5-8 per cent, down from 14 percent in early 2000.

The first clue that rates have bottomed out - hardly any rate cut announcements from banks in the month of May. That marked an unusually silent period after rather cacophonous and competitive rate cutting, by banks and housing finance companies, almost every month, during the last three years. Rates have reached a plateau over the past two months.

There is a second clue that rates may indeed start moving up soon. Housing finance companies say there is a noticeable trend among borrowers to shift from floating rates and lock into fixed rates. "We are signing more newer sanctions on a fixed rate," said a housing finance company official.

Early in March this year, rating agency, Crisil had come out with an outlook that predicted home loan rates would go up in the short to medium term, reversing a trend of the last four years.

Crisil's study had said that the housing finance sector's profitability was under threat, since the incremental return on equity (RoE) was very low - for banks, the RoE on their housing finance business was 9.01 per cent compared to 18.8 per cent in financial year 2002-03.

It was even lower at about 6.93 per cent for housing finance companies against 20.53 per cent of 2002-03. Such low returns were unsustainable in the long run and would push up interest rates by 50 to 100 basis points, the study had said.

Bankers seem to agree with the perception that rates have bottomed out. They are largely in agreement with Crisil's outlook, although they ascribe different, if more contemporary reasons for the phenomenon.

Mr V. Sreenivas, General Manager, Personal & Development Banking, State Bank of India said "We don't expect further reduction in rates now. Internationally rates have started moving up. After six months domestic interest rates could harden. We will respond, in a gradual and measured manner, if there is an increase in rates".

Mr George John, General Manager - Credit, Federal Bank, told Business Line that the three main factors that could force the rates up were the cost of resources, ruling inflation levels coupled with upward revision of petroleum product prices, and the US Fed policy stance.

Mr John expected the demand for upward revision of provident fund and small savings rates would lead to increased deposit rates. This would naturally get reflected in raised lending rates, including for housing finance, he said.

Echoing these sentiments, Mr C.T. Francis, Assistant General Manager-Credit, of Catholic Syrian Bank said, "housing finance rates seem to have bottomed out, going by the macro-economic situation, trends from the Reserve Bank outlook on repo rates and other standard market parameters," he said. That is perhaps not the rosiest picture for prospective buyers/builders of housing property.

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