|Business - Real Estate Crash And Rising Interest Rates|
| By : Gautam Lohar||Previous | Next|
| Posted on : 12 Dec, 2006 ||Total Views : 2999|
Academically rise in interest rates affect the price of real estate in two ways. One, the higher interest rate on home loans would increase the monthly installment. The effect of 0.5 percent change in rate of interest get multiplied manifolds when its compounded effect is calculated for a loan of 20 years. Second because of higher bank rate liquidity in the market goes down and which in turn reduce the investment in real estate.
In last two years real estate prices skyrocketed 80 to 400 percent. A flat costing Rs 18 lakh in Gurgaon , now costs around Rs 45 lakh. Because of hardening interest rates on home loans (rose from 8 to 10.5 percent in last two years),the middle class is finding it difficult to afford a house and in past six months demand of properties has substantially gone down.
Rise in petrol prices and other commodities have further put the pressure on monthly budget of middle class, forcing them to postpone the purchase of house. The interest rates are further expected to rise in future and also most of the banks have already met its 25% of total lending to the housing sector and would be unable to increase the loan in housing sector. In order to discourage speculative investors in real estate,RBI has directed the banks not to lend without verifying goverment clearances and also increased the risk weight of real esate. Crash in stock exchange prices has contributed to fall in demand of real estate.
Property dealers admit in private that demand of real estate is slowing down in Noida, Delhi, Bombay, Bangalore, and other parts of India. In fact, in Chandigarh and certain parts of Delhi prices have come down by 10-25 percent. On condition of anonymity some property dealers admit that they won’t be surprised if the residential prices fall down by 20-40% in the near future.