The impact of RBI’s monetary policy on realty prices

The Reserve Bank of India’s (RBI) recent decision to raise repo and reverse repo rates by 25 basis points each has reinforced the possibility of correction in realty prices henceforth as already declining demand is likely to fall further due to higher home loan rates.

Experts believe that although there is no specific mention of the realty sector in RBI’s monetary policy review, prices will subside by 10-15% before the end of this financial year. This may be mainly due to the fact that volumes continue to be low and the developer is at a shortage of liquidity. Also, the interest rates on housing loan continue to be high affecting volume of transactions in the industry.

In its quarterly monetary policy review meet recently, the apex bank hiked repo rate, at which RBI lends to banks, to 6.50%; and reverse repo, the rate banks receive for depositing funds with RBI, to 5.50%.

Interest rates that have started moving higher are affecting affordability and delaying decision making. Due to all these factors, the demand is not getting converted into sales since the past two quarters. A further hike in lending rates is expected to expedite the correction process, analysts claim.

Most realty industry experts have already predicted that fall in number of transactions, which began in October,2010 is expected to be followed by a correction of around 15% in the prime markets of Mumbai and NCR. After gaining nearly 40% in the past one year, residential realty prices in Mumbai have already surpassed their last peak witnessed in 2007.

These high prices, fall in affordability and rising home loan rates are forcing buyers to go back foot. But a sharper rise, as sections of the market had expected, would have impacted prices and home loan growth severely. Meanwhile, there is also speculation that banks, as a natural corollary will raise their respective interest rates.

Realtors’ cash flow that is getting affected by this fall in sales volume, the credit supply crunch and the recent bribery-for-loan scam, all these factors are now expected to force some builders to offload their inventory in the market at a negotiated price, industry experts said.

Apart from the repayment of debt rescheduled two years ago, which is due around March, redemption of structured quasi-equity instruments totalling 3,000 crore held by foreign investors is also expected in the next couple of months and all this is expected to stress already cash-strapped developers.