RBI rate cut may not impact real estate prices: Experts

MUMBAI: Sale of flats in Mumbai will continue to remain sluggish even after the Reserve Bank of India on Tuesday reduced by 50 basis points its repo rate. "The interest cut won't make homes affordable as property prices are already high and are unlikely to come down given the high input costs," said a property consultant.

Developers say they have had to increase property prices by 5% to 10% as the cost of funds has increased along with input costs and other expenses. "If banks pass on the benefit of the interest rate cut to developers, then we may see a saving of Rs 5 crore on interest costs, but it is too small to have an impact," a developer said.

After banks tightened credit to the real estate sector, developers were forced to borrow money from non-banking finance companies at 16-18% interest and from private equity funds at rates between 20 and 24%, say property experts. "The rate cut may not cause prices to come down in the near future," Sandeep Reddy, chief executive of Groff, a realty portal, said.

Om Ahuja, chief executive ( residential services) of Jones Lang LaSalle India, a global property consultant said, "It is unlikely that property prices will come down because of the rate cut. It is likely that there will be an upward bias on property rates because of the anticipated improvement of buyer sentiment."

According to NHB Residex, which tracks realty rates in key cities, flat prices in the city rose by 11.6% in October-December 2011, compared to the corresponding quarter of 2010.

"I think fence sitters will come into the market now," said Lalit Kumar Jain, president of Confederation of Real Estate Developers Association of India (Credai).

"Sales may rise by 10 to 15% on a month-on-month basis and 20% cumulatively on a yearly basis. The realty sector is heavily dependent on non-banking finance firms. Till the liquidity situation improves and banks start lending, I don't think prices will reduce," Jain added.

"The increases in interest rates between March 2010 and October 2011 had kept many prospective buyers away," he said. Moreover, due to high property prices and rising mortgage rates, the sale of residential and commercial properties fell by 15% in Mumbai during the January to March quarter this year, compared to a 9.1% fall in transactions in the corresponding period in 2011, say experts.

MCHI-CREDAI president Paras Gunecha said commercial banks should cut the interest rate so that home loans would become affordable.