Property prices are expected to correct around 20% as realty developers may not be able to hold on to the current prices following the Reserve Bank of India’s liquidity tightening move to increase repo and reverse repo rates by 50 basis points (bps) each. On Tuesday,RBI raised its benchmark short-term lending rates by 50 bps each. This was the 11th successive hike by the central bank since October 2009, pushing the rate cumulatively by 325 bps.
“Banks will put pressure on developers for improving their business liquidity. It’s a question of who blinks first, and for now, it looks like developers will. This will result in properties becoming cheaper by up to 20%, which is good news for the buyer,” said Pranay Vakil, chairman of property consultancy firm Knight Frank India. According to experts, the current rate hike may achieve what the earlier 10 rate hikes could not. Most realty developers may be now forced to cut property prices and move the inventory out to infuse liquidity into their business, said market experts.
“It will lead to softening of property prices, as this 11th successive hike in rates will push equated monthly installments, or EMIs, up by 20% at aggregate level and to take care of this 20% hike, the borrower will have to increase his pre-tax income by almost 30%,” Vakil said.
The move has come in as a shock and will hit both developers and home buyers given the higher cost of funding, said most realty developers. According to leading realtor Niranjan Hiranandani, who is also vice-president, Indian Merchants’ Chamber and managing director of Hiranandani Constructions, RBI has done “beyond what’s necessary.”
The industry is facing a crunch and the fund gap over the next five years alone would be as high as $70 billion. The RBI announcement, therefore, could be detrimental to the growth of the industry and economy,” said Lalit Kumar Jain, national president of Confederation ofReal Estate Developers’ Associations of India. This will particularly impact developers who have so far resisted any price cut.
“Volumes would certainly take a hit, particularly in the budget segment where buyers are more sensitive to increase in EMIs on their home loans. Ultimately, though, property prices should trend downwards as the ability of the developers to hold on to inventory would be increasingly under strain, given the rising cost of funds,” said Anjan Ghosh, senior group vice-president, head of corporate sector ratings