Impact Of Rising Interest Rates On Real Estate

Growing real estate prices are resulting in a decline in the demand for home loans. The rising interest rate is a additional factor.
Even though Indian realty market is observing a compounding growth, owning a home is still a tough dream for a lot of middle class Indians. Previously (2002-2006), the trouble-free availability of home loans was accelerating the realty growth drive. But, there is now considerable decline in the demand for home loans in India. Main banks have blamed the rising property rates as a cause for this cut. According to the current survey, the prices of furnished and semi-furnished houses in the metros and upcoming metros are becoming sky scrapping day by day.
The increasing real estate prices are not the only factor for this decline. However, the decline has been attributed further to the home loan interest rates that have been increasing incessantly for the earlier couple of months. As per the current details of Associated Chambers of Commerce (ASSOCHAM), rise in these loan rates severely affect the housing sector.

The growth of this sector has droped to 26.6 percent in 2006-07 from 29.1 per cent in 2005-06. The interest rates on home loans rose from 7 percent in 2002 to 12-14 per cent in 2007. This rate has made both lending and borrowing largely unaffordable.

4 Comments

  1. Posted April 26, 2008 at 1:09 am | Permalink

    There has been no shortage of conversation surrounding the topic of rising interest rates in the commercial capital markets over the last two years. The reason for all the column fodder is that interest rate movement has a direct impact on the state of capital markets supply and pricing and can have a very real impact on the overall commercial real estate market.

    As a baseline for a deeper analysis it is useful to have a macro-economic understanding of what happens to property level supply and demand drivers and the resultant impact on Net Operating Income (NOI) in a rising interest rate environment. As a general economic principal when interest rates raise the cost of new construction increases thereby slowing the number of construction starts and depleting new supply of product coming online. This scenario in turn causes an increase in overall market absorption rates and creates a “landlord’s market” environment. The environment which favors the landlord creates an opportunity for property owners to increase rents thereby allowing NOI growth to keep pace with any escalation in interest rates. While this scenario is favorable to existing property owners and making the rise in interest rates less of a concern, the impact to developers and tenants is detrimental and can have a negative overall impact on the economy if a high interest rate environment lasts for any length of time.

  2. Posted April 26, 2008 at 4:16 am | Permalink

    Delhi for two small shops of 600 square feet each, shopkeepers now pay something between Rs 1.5 and Rs 2 lakh per month. As par the tenants, there has been an increase of 10-15 percent in the property rates where Metro line is ready, and the landlords say property pries will rise further.

  3. Posted April 30, 2008 at 4:11 am | Permalink

    A recent hike in interest rates and inflation has a far reaching impact on real estate stocks.Market participants are the situation to be a double whammy of high property rates and increasing interest rates and inflation figures. High prices and interest rates are believed to be the factors contributing to the fact that real estate prices have become stable.Nowadays, a few people are showing inclination towards making prospective investments in real estate.real estate prices to have gone through rooftop substantially on land bank stories with unrealistic valuations. The real estate had witnessed a nice hike in the past two years. However, such a correction is needed and good for the market. The fall in real estate stocks may affect plans of the property developers who are planning to raise initial public offering (IPOs).The inflation does not seem to take a downturn in near future, and the Reserve Bank of India (RBI), while trying to keep it under control, will tighten liquidity further thereby bringing an increase in interest rates. The trend is likely to remain so for sometime as the inflation is an election issue. Likewise, the real estate prices are expected to remain stagnant.Not everyone is of the same view regarding the increase in prices of residential property. The economy of the country is growing at the rate of 8-9% and salaries have gone up higher seven to eight times as compared to what has been pad the four years back, while there has been no change in the housing loan rates. They are still moving at the snail’s pace. For more view- realtydigest.blogspot.com

  4. Posted May 1, 2008 at 2:51 am | Permalink

    But according to the Real estate cost the hike of the interest rate is not so bad.

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