Buying a house, is this the right time?

Nifty BSE | NSE 29/05/12 Are Mutual Funds betting on Nifty?

There is a significant amount of pent up demand for housing across India. But, a house seems like a luxury thanks to property rates that don't seem to be cooling off at all. And on the other side, home loan rates are also rising making buying a house unaffordable. In fact, Pankaj Kapoor, Managing Director of the Real Estate Sensitivity Index (Ressex), says, "Every 0.5% hike in rates dampens demand by 7%."

So is this the right time to buy a home? Moneycontrol.com's Chikita Kukreja spoke to experts and the general consensus appears to be that loan rates aren't going up just yet, and property prices, if they have to correct, will do so in the next two to three months. Here's a complete lowdown.

Challenge A: Home loan rates

Most bankers including Keki Mistry Vice-Chairman and CEO of HDFC, MD Mallya CMD of Bank of Baroda and S Shridhar CMD of Central Bank of India believe that lending rates will not rise anytime soon.

However Mistry adds, "The bank will increase lending rates if the cost of funds rises."

Challenge B: Property prices

Says Abhishek Kiran Gupta, Head - Research & REIS, Jones Lang LaSalle, "Home loan rates are indeed predicted to rise but we don't necessarily see that translating into a fall in property rates. Rather it will most likely result in the growth of property rates slowing."

Kapoor however posts a different picture. "We are back to 2008 levels where the prices were high and there was no demand. The future is bleak as I see 10-15% immediate impact of rate hike on housing demand." In fact, according to a recent Ressex study, sales are continuously declining and with every new launch inventory is increasing. The prices are at the peak and retarding sales are an indication that market is not absorbing this price rise. Service tax and costlier home loans have also added to the customers woes. Price can only go up to the extent a buyer can afford. The gap between buyer's affordability and realty cost needs to be narrowed. Price correction to the extent of 30% within two to three months seems to be imminent to bring the market to an efficient level. Right now it is a kind of another asset bubble in making.

The study also points out that a correction seems must in almost all the markets, but the degree of the correction required may vary.

City	Expected correction in %
Mumbai	30
NCR	15-20
Bangalore	15-20
Chennai	10-15
Pune	10-15
Hyderabad	15-20

According to Kapoor, two tier cities may undergo correction of around 20-25%. There may also be a time correction, which means property prices may not appreciate for four to five years. Real estate grows in the cities which have land scarcity. "The propaganda about II tier city was spread by the developers and fraudulent advisers to procure cheaper land and speculate on their valuation. They all were a part of speculation, almost all of the projects in these cities are facing problems because there is not demand for apartments whether it is Nagpur, Nasik, Bhopal or Lucknow or Panvel," he says.

But Gupta adds that if a correction does indeed occur in the residential market, the impact will most likely be the greatest in the Tier II cities across India where recent property rate appreciation was the most irrational.

Samantak Das, Head of Research India, Knight Frank, says that interest rate hikes could dampen property price rise. "This (rate hike) would adversely impact the home borrowers. Their cost of borrowing will go up. So, I feel that there would be a 'wait-and-watch' policy adopted by most of the home borrowers which will eventually lead to a downward pressure on property prices."

Solution: Buy or not to buy?

Harsh Roongta, CEO, apnapaisa.com says that if one has already made up his mind to buy a house, then it is better to do it right now, instead of doing it three months later. According to him, asset prices are also expected to rise as loan rates are definitely going to be steep.

Buy to occupy?

Gupta says, "When to buy residential property is dependent on a variety of factors-notably investment horizon and risk appetite. Timing the real estate market, like the stock market, is a difficult thing to do. Those who intend to self occupy a residential property within three to four years should consider purchasing soon before prices appreciate too much further. A medium term horizon gives them an opportunity to recover their investment should prices fall in the near term as some are speculating. If a correction does occur in the residential market, the impact will most likely be the greatest in micro-markets across India where recent property rate appreciation was the most irrational."

Buy to invest?

Das has a word of caution for residential buyers and investors. "As an investor I would not buy right now. I am expecting some price corrections in the short term as a result of monetary tightening in the economy."

Kapoor advises, "It's time to sell not buy as the market is non-conducive for any kind of purchase as of now; the prices are not fair too. Buyers need to wait for two to three months, look around for a discount and then buy."

"Only price correction can help-if prices drop, the inflationary pressure will reduce thus leading to a fall in interest rates which will once again boost demand," he adds.

In the next quarter, experts foresee inflation to come in control from today's level, thus helping the interest rate to become better! And if price correction happens by then consumers may find some good properties to choose from.