Home sale do not have inverse proposition with interest rates on housing finance

Leading dailies and peers of housing finance have given the verdict that no sooner interest rates on housing finance increases, it effects the sale of home units in the country. The research conducted by Accommodation Times
Education and Research Foundation proved it otherwise.

By Dr Sanjay Chaturvedi
Housing finance was 21% when Citi Bank in 1996 increased its interest on home loan. There were takers to the fixed percentage of home loan offered by the Bank then. The boom period of 1996 to 1997 had seen historical high interest rate on home loan. Though the rates was highest, the property and real estate market never got jolt. It all started in 1993 when HDFC touched fixed rate of interest at 16.5% p.a. And for NRI the NBFC started with 18.5% p.a. for NRIs. The year 1993 was a start for regime in increasing the interest rate on home loans and the market also had set a rally for an unpreceedented boom of 1995-97. See in table A, where HDFC started charging 16.5% p.a. In 1993 where as other players like LIC and Can fin Home charged at 19 and 21 % p.a. respectively. ICICI started its operations only in 1999.

93 Interest Service Charge
1 HDFC 16.50% 1.00% (‘92 15.5%)
HDFC NRI 18.50% 2.00%

2 LIC
Griha Lakshmi 19 1500/- Upto 10 L
Griha Sobha 19 1500/- 10 L

3 GIC
Apna Ghar 16.5 250/-
Yojana 1% Admin
1% Comitment Charge
Canfin finance 21

4 Canfin Home Loan 18.5 1% Admin

5 SBI Home Finance 18

6 Citi Bank 17 3.00%

The first major turning point in the Indian housing sector came in 1997, when the market conditions began to favour the purchaser. Housing became a buyers’ market, augmented by housing finance. Despite the recessional conditions faced by the rest of the economy between 1997 and the year 2000, both the housing as well as housing finance Sector grew by 30% per annum. Builders, realizing that the markets had turned into a buyer’s market, changed their strategy by going for volumes rather than margins. The resultant fall in prices further fuelled demand and the need for Housing Finance enhanced. On the new construction side no significant relationship between price and quantity, consistent with perfectly elastic supply. Joint families gave way to the nuclear family system, fuelling housing demand. Technology also played its part; with the advent of the internet and telecommunications, the city centre became less attractive and suburbs & satellite towns became a good place to reside. This prompted new projects, better design and construction features, amenities, ambience and side attractions such as clubs, shopping centers, creches, recreational and educational institutions. With the fall of monopolies, both in housing and housing finance, loan interest rates started falling, first in 1999 continuously till the year 2004. Increased competitions in the Indian Banking industry has driven the interest yields and consequently, the Net Interest Margin (NIM), southward. From 2004 onwards, there has been talk of rates inching upwards, particularly in view of uncertainty at the political level, increasing price of petroleum and increased credit usage by the corporate sector, in comparison to the 1997-2000 period. As shown in Table B, the demand for housing and registered documents with registrar office have increased many fold despite interest rates have increased in 2004 onwards. By 2006, housing finance in the country was a formal trade and industry regulated by National Housing Bank.
15th Feb 2006
PLR Fixed
1 Bob Hsg. 9.75 9.75
2 Canfin 9.5 8.5
3 Citi Bank 8 8.25
4 Dewan Housing 7.5 8.25
5 HDFC 8 9.5
6 HSBC 7.75 8.5
7 HUDCO 8 8.25
8 ICICI 8 9
9 IDBI 7.5 8
10 Kotak Mahindra 7.25 7.75
11 LIC 7.25 8.25
12 SBI 7.5 8.25
13 GIC 8.25 10

Flats Sold between 2005-2006 Jan 05 to Sept 06
Flats Development Agreement Sale deed
Andheri II 17351 160 471
Andheri III 20691 137 310
Andheri IV 11399 61 107
Borivali I 14345 39 116
Borivali II 16280 131 370
Borivali III 14876 99 158
Borivali IV 14210 46 137
Borivali V 13764 87 226
Borivali VI 13917 68 164
Kurla II 13000 62 538
Kurla III 17811 110 568
Kurla IV 618 1 36

2007
PLR Fixed
1 LIC 11.25 12.75
2 HSBC 12 13
3 HDFC 11 13
4 ICICI 11.5 14
5 SBI 11.75 -
6 UBI 11.5 -

By 2007, the interest rates again had seen a mature market and interest rates had touched almost 14% p.a. on fixed rate basis. Many banks like Stan Chart had flexible approach and charged its customers on his/her profile basis instead of card rate basis.
The housing finance is undoubtedly a technical area and needs specific expertise. Moreover, few banks have long term finances to stabilize their housing finance operations.
The lack of technical expertise of banks have been fully exploited by scamsters who availed of multiple loans against the same property through forged papers. Banks like Citi Bank , Standard Chartered and ABN Amro target the creamy layer of society, but the Direct Sale Agent (DSA) model also has provided illustrations of large-scale unhealthy practices. Thus, Housing Development Finance Corporation, HDFC, continues to be the market leader, with the other prominent specialist being Life Insurance Corporation Housing Finance Limited (LICHFL).

Deduction of Interest Limit
95-96 10,000/-
96-97 10,000/-
97-98 15,000/-
98-99 15,000/-
99-2000 30,000/-

Certain organizations like GRUH Finance Limited lend to the lower strata of society. These loans are viewed as inviable by the larger banks and housing finance companies. GRUH Finance Limited competes in the same market as credit societies and other informal sources of lending. Thus, unless there is a harsh recovery mechanism or the ‘group lending model’ adopted by micro finance organizations, the risks in this market segment are real and could translate into bad loans. Parshwanath Housing and many others who offered small loans, with all noble intentions, had to close operations because of the inherent risks in this market segment. Risk is inherent in any commercial activity and banking is no exception to this rule. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today’s financial system. The importance of the housing sector in India can be judged by the estimate that for every rupee invested in the construction of houses, 78 paise is added to the gross domestic product of the country and the real estate sector is subservient to the development of a number of other industries. Not all banks may remain in the housing finance sector. There are two reasons. Housing finance is a long term business. When the demand for industrial short term credit rises, banks will move funds to that sector where they are more comfortable. Moreover, many banks have burnt their fingers due to lack of knowledge on technical, market and legal aspects. At the moment, there is an element of cross-subsidization in the pricing of loans by banks. Besides fund raising and documentation, housing finance companies are facing stiff competition within the sector hence keeping the interest rates low is major management exercise. But it seems that it is a competition to raise the interest rates though RBI Repo rates are indicative and not compulsion, almost all housing finance institutions opt to increase the rates despite the fact that their financial still can bear the burden of low interest rates. Though housing finance is safest bet to lend money since it is secured by real estate mortgage, Institutions are profit mongers and donot want to loose oprtunities by enhancing rates. Though there is no direct relation established, a fear psychology work through media , that interest rate of housing finance decides the real estate market faith.