Analysts feel that the small hike in short-term lending and borrowing rates will not hurt the realty sector as buyers are more concerned over skyrocketing property prices rather than rising interest rates

The hike in the short-term lending and borrowing rates by the Reserve Bank of India (RBI) would not impact the real-estate sector, according to analysts. The hike in repo and reverse repo rates may lead to increase in housing loan interest rates but will not affect buying capacity, as house buyers are more concerned over skyrocketing property prices rather than rising interest rates, a number of industry observers told Moneylife.

Ashutosh Limaye, associate director for strategic consulting, Jones Lang LaSelle India, said, "Home loan (interest) will increase. However, it would not have much of an impact on the realty segment because what we have seen is the base price and the property price increase is the more determining factor than the home loan factor. If the home loan rate was to increase by 2% to 3%, it would have a significant negative impact, but 25 basis points (bps) or 50bps change doesn't make much impact on the buying capacity of people."

The Reserve Bank of India (RBI) on Tuesday raised the repo rate (the rate at which the RBI lends to banks) and reverse repo rates (the rate at which the RBI absorbs excess liquidity from the system) by 25bps, each while keeping the cash reserve ratio (CRR) and bank rates unchanged.

Pankaj Kapoor, founder and managing director, Liases Foras, feels that the hike by 25bps would not have any impact on the housing sector. He said, "Every 50bps increase in the rates decreases the demand size for properties by about 7%. Although with the 25bps hike, home loans would become more costly, but I'm also of the opinion that this increase would not create too big an impact."

Expressing concerns over the real-estate sector, the RBI also announced a cap on the loan-to-value (LTV) ratio and increased risk weight for home loans above Rs75 lakh. It said in order to prevent excessive leveraging, the LTV ratio, in respect of housing loans, should not exceed 80%. Irrespective of the LTV ratio, the RBI also increased the risk weight for residential housing loans of Rs75 lakh and above, to 125%.

At present, for loans up to Rs30 lakh the risk weight on home loans with up to 75% LTV ratio is 50%. For housing loans above Rs30 lakh it stands at 75%. In case the LTV ratio is more than 75%, the risk weight of all housing loans, irrespective of the amount of loan, is 100%. 

Reiterating its concern over the 'teaser rates' for home loans offered by lenders, the central bank said it observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. In view of the higher risk associated with such loans, the RBI asked commercial banks to increase the standard asset provisioning for all such loans to 2% from the current 0.4% in order to provide cushion for any default.

Pradeep Jain, chairman and managing director, Parsvnath Developers Ltd, said, "I would say that the overall policy is designed to check the creation of a pricing bubble in the market. The loan value restriction has been brought down to 80%, which will certainly check the flow of funds into the market thereby giving bankers an option not to increase loan rates. Yes, teaser loans may be removed. This RBI move will not have any impact on demand, as demand is directly related to economic development and our economy is growing and sentiments are positive. What is required is to increase supply to curb inflation. With adequate supplies in the markets for all kinds of buyers, I am confident that we will not see any impact on our sales in the near term."

Although the impact of RBI's rate hike would be known after some time, real-estate shares felt some tremors. Following the announcement, the Bombay Stock Exchange (BSE) realty index fell 3% to 3,644 points. Unitech was the top loser and ended 3.3% down at Rs86.25. It was followed by IndiaBulls Real Estate, DLF, Sobha Developers and Anant Raj Industries.

Commenting on the performance of real-estate stocks, Mr Kapoor said, "They (stocks) were highly overpriced and why they have fallen is because of faulty valuations in the beginning. If they are going down, it is nothing but that they failed to perform what was proposed. It is a correction in the valuation. They might be a further correction, because the way (in which) the valuations were carried out was faulty."