Realty sector may see price correction

MUMBAI: The Reserve Bank of India’s (RBI) decision to hike repo and reverse repo by 25 basis points each has reinforced the possibility of correction in realty prices hereon as already flagging demand is likely to fall further due to higher home loan rates.

“Despite that there being no specific mention of the realty sector (in RBI policy review) we continue to believe that the prices will soften by 10-15% before the end of this financial year,” said Pranay Vakil, chairman of Knight Frank India. “This is mainly due to volumes being low and liquidity being tight with developer. Also, the interest rates on housing loan continue to be high affecting volume of transactions in the industry.”

In its quarterly monetary policy review meet on Tuesday, the central bank hiked repo rate, at which RBI lends to banks, to 6.50%; and reverse repo, the rate banks receive for depositing funds with RBI, to 5.50%.

Interest rates that have started moving higher are impacting affordability and delaying decision making. Because of all these factors, the demand is not getting converted into sales since past two quarters. A further hike in lending rates is expected to expedite the correction process, analysts said.

Most realty industry experts have already forecast that fall in number of transactions, which started in October, is expected to be followed by a correction of around 15% in key markets of Mumbai and National Capital Region. After gaining nearly 40% in the past one year, residential realty prices in Mumbai have already surpassed their last peak witnessed in 2007.

These high prices, fall in affordability and rising home loan rates are pushing customers back. But a sharper rise, as sections of the market had expected, would have impacted prices and home loan growth severely.

“We are relieved that the rates have been hiked by only 25 basis points. The way inflation was going up, there was a justification for even a higher rate hike. Liquidity still remains tight. We all (banks, financial institutions) will have to raise the lending rates as the margins are squeezing. All retail loans rates will go up,” Housing Development Finance Corporation’s chairman Deepak Parekh told ET NOW, this paper’s business television channel.

Realtors’ cash flow that is getting affected by this fall in sales volume, the credit supply crunch and the recent bribery-for-loan scam, all these factors are now expected to force some builders to offload their inventory in the market at a negotiated price, industry experts said.

Apart from the repayment of debt rescheduled two years ago, which is due around March, redemption of structured quasi-equity instruments totalling 3,000 crore held by foreign investors is also expected in the next couple of months and all this is expected to stress already cash-strapped developers.