The Hindu Business Line : Rate cuts too small to spur demand

Despite the Government talking of bringing down home loan interest rates, the largest players in the market, including housing finance institutions and banks catering to more than two-thirds of the home loan borrowers, are yet to make significant cuts in interest rates.

Compare the rates offered by housing finance institutions, such as HDFC and LIC Housing Finance, or ICICI, which have left the home loan rates unchanged, with that of other public sector banks that have implemented a cut in rates in the last one week: For borrowers, there appears to be no reason to cheer.

Not that the reduction is unwelcome in these difficult times for the existing borrowers.

Cosmetic changes

The few banks that have cut their home loan rates, including the State Bank of India, have announced a reduction of up to 75 basis points. According to industry watchers these are at best cosmetic changes in deference to the continuous demand from the Finance Ministry to increase liquidity.

First, the rates are floating rates, and effectively may be considered to be an ‘offer price’ to initially attract the customers. The rates are subject to being reset within a few months to match with the rest of the market.

Second, the maximum difference in rates between banks that have announced a cut and those that have left them unchanged is only in the case of low tenor loans of up to five years but the average housing loan for a wage earner runs at least three times longer and for these the gap between the rates offered by the banks and housing finance institutions narrows.

The banks have also segmented the market into those borrowing less than Rs 20 lakh, those borrowing between Rs 20 lakh and Rs 30 lakh, and those taking loans above Rs 30 lakh, and appropriately tinkered with the rates. Here again the gap between the reduced rates and those of others who have not cut their rates is not significant in the case of loans above Rs 30 lakhs.

Intended effect unlikely

So the reduction of 50-75 basis points is not all that it is touted to be and is not likely to have the effect that it is expected to, that is, rejuvenate the housing market by helping stimulate demand through supportive home loans.

These reductions are not going to make built-up space any more affordable to the common man. In rupee terms the reductions announced effectively mean a decrease of about Rs 50 in EMI per lakh of rupees, hardly an incentive that could sway an investment decision for a home buyer.

Lenders themselves agree that it was never the small changes in interest rates that attracted or drove away home loan buyers. For instance, housing finance institutions say that over the last six months their housing loan disbursements have been stable.

Economic scenario

In the coming months, the lenders are more concerned about the impact of the overall economic scenario than interest rates. As reports of job losses and pay cuts across various segments of industry come in, the morale of the wage earner and businessmen would hit a new low. They would be unwilling to commit funds, and the mood of the buyer is unlikely to change or be swayed by an interest rate reduction of less than a percentage point.

More importantly, for the buyers, the slowdown is an indication that the developers are likely to bring down prices as they increasingly come under pressure to improve their liquidity.

The sentiment among the buyers is that it would be a good idea to wait and see if things settle down. More than interest rate cuts, what would be of value to the end buyer is an overall reduction in prices that would help to bring down the total cost of owning a house.

R. BALAJI

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