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If
you've had your feet up these past few years, flipping leisurely
through all those real estate brochures, rubbing your relaxed palms
at the prospect of ever-cheaper home loans... taking your own sweet
time making up your mind, it's time to sit up.
Do not let the following two facts escape your
attention. One: residential real estate prices are back on an upturn.
And two: home loans are unlikely to get any cheaper. In other words,
the assumptions that had elevated your feet are no longer valid.
You no longer have the comfort of waiting. If you must buy your
own home, it's time to act-and nail your property to a fixed rate
as low as you can.
What's The Hurry?
The hurry is simple. After some five years of
stagnation, home prices have started rising in swank suburban enclaves
such as Gurgaon's DLF City near Delhi, while loans are still at
their most attractive. It is a 'window period' of sorts. A year
or more later, things could possibly be different. "Worldwide,"
says Shefali Sachdev, Director, Credence Analytics, "the interest
rates may start rising now."
A couple of years ago, investment advisors
were recommending floating rate home loans. Even a year ago, this
was not lousy advice. These are loans for which the interest payable
changes over time in accordance with prevailing rates, and with
falling rates, you could expect successively lower monthly instalment
bills. Indeed, loan rates have fallen from 10-11 per cent a year
back to 7-8 per cent now. The intense competition in the home loan
sector has played a big role, together with the RBI's overall easy-money
regime. The eye-stopping offer of the moment is ABN Amro Bank's
introductory offer in Delhi of 6 per cent interest for the first
year and 6.5 per cent for the next. Other banks have responded with
special deals of their own. But otherwise, the general going rate
is 7.5 per cent for a floating loan and 7.75 per cent for a fixed
loan.
Now, barring an economic miracle, it is unlikely
that you will get anything much lower than that. That being the
case, it makes sense to fix it right there-and relax for the next
20 years. Remember, what matters is your real burden of debt down
the years. Inflation erodes this burden, and is a very important
variable to consider. If inflation rises, you can smile the smug
smile of a market beater. If it remains subdued, 7.5 per cent would
still be a fair deal-except that the 'pinch' of repayment instalments
will not reduce itself to nothing down the years, as it otherwise
would have.
| HIGH RISE LIVING |
 Property
bubbles don't exist. So went the myth. Then, in 1996, real estate
prices spiked upwards and then crashed. They crashed so badly,
and then went into such a prolonged slump, that people had begun
to wonder if property escalation was a thing of the past. Anyone
thinking of buying a home was advised to wait for a further
fall in prices (and interest rates). And visitors lured by gung-ho
stories of the next-China were embarrassedly changing the topic.
In some of India's newer residential townships, it has taken
years for actual living-space demand to catch up with all
the excess construction done on Shenzen-scale boom visions
of the early 1990s. By 2000, though, according to Kekoo Colah,
Executive Director, Frank Knight India, a real estate consultancy,
prices had stabilised. And now, there are incipient signs
of a market revival. "The demand for housing now is very
high compared to any point of time in the past," says
Colah. Credit this to higher incomes, tax incentives, global
exposure and the yuppie thing for a picturesque garden-scaped
suburbia. And when prices go up, so does the attention the
sector gets. "There is increased interest from small
investors looking at real estate as a viable investment option,"
says Chanakya Chakravarti, Executive Director, Cushman &
Wakefield India. The rent yields, though, are still in the
low single digits in most places; so capital appreciation
is all an investor has going, really. Even there, do not expect
a mid-1990s kind of boom. India isn't quite the dramatic high-rise
story that redefined South China's skyline and wowed the West.
Moreover, there's no land-squeeze in some of the new suburban
townships, South of Delhi for example, that sprawl across
the landscape over the horizon. But then, some re-urbanisation
phenomena occur not so much on account of classic elements
of demand and supply, but more because of a transformation
in desired lifestyles. Watch the properties that give residents
a discernible quality-of-life jump.
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Rates Could Rise
When it comes to rates, 'liquidity' is a piece
of jargon that is often thrown around. If eco-speak bothers you,
please jump to the next sub-title ('Locking In'). Else, what any
loan-seeker ought to know is this. Liquidity, as understood, is
high when there's a lot of money to go round. But once an economy
starts gaining pace, liquidity typically reduces as eager businesses
slurp up all the money to pump into their operations-and this raises
the 'price of money', the interest rate.
Consumer demand has its own role to play. If
there's a flash flood of money with millions of wallets opening
up without sufficient supply to meet this surge in demand, you get
'inflationary pressure'. This is when a central bank would raise
the benchmark interest rate-spurring commercial banks to raise their
own lending rates as well.
That's the theory. And what's the reading of
actual market conditions? There are signs that consumer demand is
on an upswing. But financial experts do not detect a significant
difference in liquidity conditions yet, which suggests that the
market is yet to fully catch up with existing production capacity-before
the next investment wave begins.
According to Keki Mistry, Managing Director,
HDFC, short term rates might even fall some more. "The liquidity
in the system could possibly push short term interest rates a little
lower from where they currently are," he says. "However,
we are unlikely to see long term rates going down any further in
the near term. The yield curve in India is very flat and this has
to steepen."
The 'yield', as the word suggests, is the annual
return on a debt instrument such as a bond. This is not plainly
an interest rate because it depends on the price at which the bond
is bought (in the secondary market). Yet, for all practical purposes,
you could read a yield figure-expressed in percentage terms-as an
interest rate on a loan. The 'yield curve', then, is a simple graph
that shows the interest rate rising upwards as the tenure of the
loan increases (from hours to decades).
At the moment, the Indian yield curve is abnormal,
with very little difference in interest on overnight call money
and a 10-year government bond (also called gilt). With inflation
now hovering in the 5 per cent region, and demand for gilts still
so strangely strong, the yield on 10-year gilts has actually fallen
slightly below inflation-which implies negative real returns. "This
is an unsustainable condition, and has triggered a correction in
the gilt market," says Sachdev, expecting gilt yields to rise
further (achieved by a fall in gilt prices). "The long term
rates have already bottomed out," agrees Saumitra Chaudhari,
Economic Advisor, ICRA, explaining how the curve could return to
normal. "Therefore, a steeper yield curve will come most probably
from rising long term rates."
Locking In
So what does all of that mean? That you had
better nail that rate down now, or live to clench your teeth as
loan rates rise. "Locking in at fixed rates will be safer,"
says Mistry. "By doing so, the borrower may lose out when interest
rates fall, but stays protected when rates rise." As explained
above, that long-term rates will rise is a bigger likelihood.
The other problem with floating rate loans
is their poor customer satisfaction record.
The floating rate is linked to the bank's stated
prime lending rate (PLR), and some banks keep this official figure
high even as they offer 'special' low rates to new customers (heads
I charge, tails you pay). So floating loans could make you feel
cheated even when market rates are descending. Breaking out of such
a raw deal requires you to either shift your loan to another bank
or have your loan restructured, both of which involve cost.
Everything considered, a fixed rate loan is
what any home buyer should opt for nowadays. Just be careful, though,
while reading the fine print. Watch out for deals that appear cheap
only because they have postponed your pay-back burden. If the all-too-tempting
offers from ABN Amro Bank have caught your attention, for example,
do yourself a favour and pay these banks a visit. But do find out
what rate you must pay after two years. Not every seemingly fixed
rate is a fixed rate.
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