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There was a time, roughly between 2005 and 2007, when house prices began climbing at an accelerated pace overtaking the pace of income growth and rental rates.
Along with the dangerously rising real estate prices partly due to speculation, the interest rates for loans also started climbing. Finally in 2008 a saturation level was reached, when everything came to a stand still.
Banks tightened their lending norms, real estate projects could not be completed due to lack of funds, recession in the global markets created a slump in foreign investment especially in the realty sector, ripple effects of global recession led to massive job cuts and other associated effects.
At this point, the Reserve Bank of India stepped in to create liquidity in the market and to ensure fund flow with a spate of CRR (cash reserve ratio) and repo rate cuts, which is still continuing.
Banks soon started slashing interest rates and this trend is also still continuing. Meanwhile, though property rates are not following the same pace in rate cuts, it is happening gradually.
What are the three most important factors that fuel the growth of the housing segment?
a. The availability of funds primarily through home loans;
b. From the buyer's perspective, the confidence and ability to repay the loan, which is a direct reflection of the economic situation and demand for jobs; and
c. A robust realty market that has a balanced demand and supply equation.
RBI measures have helped banks create the needed funds to enable lower interest rates for the loan consumers. Hence the aspect that ensures availability of funds to purchase homes has stabilised a bit wooing buyers to create a supply for homes.
However, on the other hand buyers, especially first time home buyers are still waiting to bide time till property prices correct themselves further and stabilise before making a purchase decision.
Also, due to recession most top rung corporate players are finding times difficult and have indulged in cost cutting measures.
One of those measures has been job cuts, which has created a feeling of uneasiness amidst potential home buyers.
Most of them do not wish to opt for crucial, 'huge chunk of money' involving long-term investments at this point in time. This factor, however, can be overridden by a significant dip in property prices.
The first-time home buyer has to intuitively feel that the big moment of a low interest rate and an attractively priced home offer come together hand in hand providing the opportunity of a lifetime.
They should feel that they are getting a good bargain that they cannot afford to miss, which will then override the doubts that the current ripples of global recession has created making them take that leap of faith.
At one point all odds were against them -- home loans with high interest rates, escalating property prices and a market which favoured investors more than the first time home buyer.
Now, the scenario is looking different with at least one option looking feasible -- lower and affordable home loan interest rates. There is current evidence of industry reports that suggest home loan interest rates are likely to fall as low as around 8 per cent, like how they were in the year 2004.
This is fantastic news for aspiring home buyers, who can for the first time in many years have an EMI and loan tenure that allows them to accommodate other priorities in their budget easing their mind a bit towards their home loan liability.
As one shut door has opened, they are eagerly waiting for other doors to open too, namely a further drop in property prices making it affordable and the other an assurance on the economic front with a consistent demand in job sectors.
Industry experts currently believe there could be around a 15-20 per cent fall in property prices leading to a correction in the market. On the other hand some industry players in the realty market are suggesting that property prices have already fallen around 10-25 per cent over the past year and hence further fall in prices may not happen.
Considering both views, if buyers are waiting for a further massive fall in prices of say around 60-80 per cent, realistically speaking, they may have to wait quite a long while and in all likelihood it may not occur.
However, a good way to figure this out is to wait for a further fall in prices and see if they stabilize over the next few months and then begin to start on the upward swing again. At this point in time the aspiring home buyer could quickly make a move, get a home loan that has the least interest rate and purchase his dream home.
Thus he can make his purchase comforted with the knowledge that the market has indeed finally stabilized and there would be no point in waiting further.
Industry experts predict that the second quarter of 2009 could present opportunities for the prospective home buyer to land an excellent home deal.
The author is Head of Content & Research at BankBazaar.com.
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