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RBI Hike in Key Rates will Lead to Rise in Property Prices: CREDAI

Comments Off on RBI Hike in Key Rates will Lead to Rise in Property Prices: CREDAI   |   July 27, 2011    08:18am   |Contributed by Indian Realty News

Real-estate developers and property consultants termed the RBI hiking key rates as harsh and said it would compound the woes of the sector reeling under high input cost and poor sales. Pradeep Jain, chairman, Confederation of Real Estate Developers’ Association of India (CREDAI), said, “Unless steps are taken to improve supply system, this increase by RBI is going to have a minimal effect on inflation. While we were expecting a moderate hike of 25 bps, the 50 bps raise is going to dampen growth. This will make cost of funds expensive for both developers and buyers, coupled with constant increases in input costs, making the business environment very complex across industries.”

Jain said developers were left with no choice but to pass on the costs to buyers, which will result in increase in property prices. Lalit Kumar Jain, National President of CREDAI, said material cost had already gone up by over 35 per cent and wages had doubled over the last three years. Any increase in the rate of interest would be counter-productive and would give rise to inflation instead of curbing it. The Maharashtra Chamber of Housing Industry, while stating that the hike would adversely impact the industry, appealed to home loan institutions and banks to absorb the impact and not pass it on to the end-customers.

“Bankers have systematically raised home loan interest rates as and when the RBI hiked the repo rate, and we strongly feel that they should consider the home buyers’ interest,” said Mr Paras Gundecha, President of MCHI. Over 200 industries depend on the real-estate industry and it was the duty of the government to help it grow instead of taking steps to further cripple it. Sanjay Dutt, CEO, business, Jones Lang LaSalle India, said the 50 basis point increase was expected to impact growth. Demand for real-estate was a factor of economic growth. “The sector has now taken a body-blow with the combined onslaught of increased cost of land and construction, eventually making the finished real-estate products more expensive. Increased mortgage rates would only compromise demand further. Investors, particularly, would ask themselves serious questions about the right time, place and price to enter real-estate. Their primary concerns would be about the possibility of decreased demand for and therefore decreased profitability of the projects they invest in. They would face the risk of exiting at lower values.”

Residential buyers in cities with higher purchase rates and ticket sizes would be impacted the most. Blue-collar home loan borrowers with limited budgets would be severely hit, he said. Bharat Mody, chief financial officer, Ackruti City, said real-estate has already been affected due to significant increase in home loan rates over the last one year Add to it the increased cost of construction and land acquisition, besides the higher funding cost for developers. All this has led to higher prices for home-buyers and now this hike in rates may keep the sentiment depressed ahead of festival season. Sanjay Kabra, chief financial officer, Sunil Mantri Group, said the Government needs to address causes of inflation, including efficacy of government spending and the embedded cost of corruption and mis-governance, which eventually is passed on to the common man. The real-estate sector is reeling from high cost on the supply side and deceleration on the demand side, as debt servicing had become increasingly difficult.

Harresh Mehta, CMD, Rohan Lifescape, felt that the monetary tightening beyond a point was bound to impact capital formation and investment. Interest cost in India was among the highest in the world and further rise was bound to have an impact on real-estate development as well as demand. Anil Kothuri, executive vice-president, Edelweiss Housing Finance, said the hike is aimed at anchoring inflationary expectations. However, it could be close to the end of the rate tightening cycle as growth tapers off and the impact of previous rate tightening action kicks in.

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