To buy or not


The real estate market is hanging on the razor's edge and multiple triggers are slowing the market down. This article examines the current trends in the realty market.

Funding pressures

The sector is facing funding woes in the current environment of rising rates. The Reserve Bank of India had raised interest rates in June 2011 for the 10th time since March 2010. Further, inflation as measured by the wholesale price index rose 9.44 per cent in June, up from 9.06 per cent in May, thus smashing hopes of a pause of a further rise in interest rate.

This has led to higher costs for the buyers. According to analysts, purchasing activity which had seen a drop during the last tranche of interest rate hikes will see a further drop in buyer interest now. Owing to the last 10 rate hikes by the central bank, EMIs for housing loan have risen 25 per cent to Rs 980 per Rs 1 lakh of borrowing, and consequently loan eligibility for home buyers has declined 20 per cent.

Not only buyers, but even the real estate companies are also in troubled waters. Cost of funds for developers ranges anywhere in the range of 14.5-16 per cent depending on the credibility of the borrower. The rate hike is only making it more expensive. Also the banks have been skeptical about lending to the real estate sector in the recent past. The Reserve Bank of India has laid out strict and tedious due diligence standards for banks in sanctioning loans to the real estate sector. The banks have to verify the documents, including cross verification with the local administration to ensure that frauds are eliminated. The central bank has also asked banks to independently verify the authenticity of the chartered accountant's certificate, property valuation certificate, legal certificate, guarantee/line of credit or any other third-party certification submitted by the borrower.

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