Anuj Puri, chairman of Anarock Property Consultants, today called on the Reserve Bank of India to go for a cut of at least half a percentage point in the overnight interest rate to ensure that the real estate sector is revived.
The call comes in the wake of a global slowdown in consumption and investment, and similar efforts by central banks across countries like the US and Japan.
A week ago, the US Federal Reserve reversed its policy of trying to normalize interest rates and its balance-sheet — both of which were manipulated in the aftermath of the 2008 global financial crisis to pump massive amounts of cash into the economy.
The US Federal Reserve cut its interest rate by 0.25 percentage point in July, the first time it had done so in almost a decade.
The RBI too recently starting cutting interest rates to help banks lend more money and make up for reduced lending activity from non-banking players like housing finance companies and so on. The ‘credit freeze’ afflicing the non-banking sector had led to a noticeable weariness in demand for real estate in the last six months.
Puri said it was therefore important for the RBI to now provide a massive boost to cash availability in the market so that at least some sections of the people will go out and buy houses.
Last month, Anarock said the Indian housing market witnessed a 13% sequential fall in housing sales in the cities, breaking a recovery trend since the market was disrupted by demonetization and RERA legislation three years ago.
“Overall consumption in India has taken a serious beating in the recent past, and the RBI needs to give a serious booster shot to hike up consumer sentiments. A massive rate cut of at least 50 bps in the upcoming monetary policy could be meaningful since a cut of such magnitude would make it feasible for commercial banks to lower the interest rate substantially.
“At the end of the day, only significant transmission of a repo rate cut can help revive much-needed consumer demand. Real estate is a highly cost-intensive investment and demand for it will only pick up if the cut is deep enough to result in significant cost savings on home loans,” he said.
He also pointed out that it was equally important that banks passed on the benefits of a policy cut to end consumers.
Puri, however, cautioned that demand in the real estate sector was not merely the by-product of cheaper loans. People will buy real estate only if they feel that they will be able to sell it at a higher price later on, he pointed out.
“..it is not only affordability but other factors such as low ROI (return no investment) and lack of confidence in under-construction projects that have impacted housing demand in recent times. Reduced interest rates alone may not help kick-start a wholesale revival in housing demand for all budget segments,” he added.
Despite this, Puri said, a cut in finance costs will help in boosting demand in the affordable housing segment, where people generally buy to live in, rather than as an investment.