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Good news! Home prices may fall soon

Last updated on: November 3, 2010 09:26 IST

Good news! Home prices may fall soon

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The measures announced by the Reserve Bank of India (RBI) are expected to hit home sales and prices are expected to correct by 15-20 per cent in the next two to three months, say real estate consultants and analysts.

Apart from raising key rates, RBI has increased the standard asset provisioning by commercial banks for teaser home loans from 0.4 per cent to two per cent, capped the loan to value (LTV) ratio to 80 per cent and increased the risk weight on loans of more than Rs 75 lakh to above 125 per cent.

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Image: Housing prices to fall.

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Banks are expected to either end teaser loans or increase rates, making home loans expensive.

At present, the teaser rate is around eight per cent. Experts say developers are also likely to discontinue the '10/90' schemes, where buyers pay 10 per cent at booking and 90 per cent after possession, as the LTV ratio has been capped at 80 per cent.

Indiabulls Real Estate and the Lodha group are among the developers which have such a scheme.

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Image: Builders will be forced to cut prices.

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Impact in 2-3 months

"If rates rise and affordability falls, you can see the impact on property sales in the next three months," says Sunil Rohokale, executive director, ASK Group, a financial services firm with exposure to real estate.

Pankaj Kapoor, managing director of realty research firm Liases Foras, expects that prices will fall by 15-20 per cent due to lower sales in the next two to three months.

Barring new projects, residential sales are stagnant in Mumbai and the National Capital Region (NCR) due to the steep increase in prices compared to last year's levels, according to Liases Foras. Home prices in Mumbai have crossed their earlier peak of 2007-08.

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Image: Prices will fall by 15-20 per cent.

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"Developers have been increasing prices despite a dip in volumes. RBI wants developers to focus on selling apartments and use that for construction purposes, than tapping other funds," says Anshul Jain, chief executive of DTZ India, a global property consultant.

Mixed signals

The measures are expected to curtail speculation in real estate, say experts. Investors account for over half the sales of residential projects in places such as NCR, consultants say.

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Image: Drop in sales.

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"It (the policy) gives a strong signal to real estate developers and the financial community about the bubble in the sector. By capping the LTV ratio and raising the risk weights, the policy aims to curtail participation of investors and encourages end-users,'' says Rohokale.

But some property developers say RBI's steps may not curb demand for homes, given the buoyancy in the economy and rising salaries.

Says Rajeev Talwar, executive director of DLF, the country's largest property developer: "RBI has got it wrong this time. The real problem of rising asset prices cannot be contained this way. By decreasing housing supply, these measures will fail in the long run. This is a short-term measure."

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Image: DLF.

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Pradeep Jain, chairman, Parsvnath Developers, a New Delhi-based realty company, said, "The policy is based more on perception than ground reality. Prices haves gone up only in Mumbai and some parts of NCR. In other places, it is not so. Those who want to buy houses will not wait for rates to come down or go up," he adds.

RBI's proposals also impacted the stock market. The BSE Realty Index was the biggest loser among sectoral indices, with a fall of 2.6 per cent. Indiabulls Real Estate (5.03 per cent), DLF (3.28 per cent) and Unitech (3.31 per cent) were the major losers today.


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