After being in crisis for many years, the real estate sector has started to show signs of recovery. Will rising home loan rates throw a spanner in the works? Rahul Mehrotra, Managing Director and CEO of Religare Housing Development Finance Corporation Limited (RHDFCL), which lends to the low-income segment mainly from the informal sector, recounts business today on the outlook for interest rates and their likely impact on the real estate sector.
BT: Do you expect mortgage rates to rise?
Rahul Mehrotra: I think that may not happen immediately, but yes, before the end of the fiscal year, we could see a rate change happening. The rate change by SBI is a precursor, but I don’t see a very drastic change happening immediately. All banks will hold rates.
BT: Can rising rates have a negative impact on the sector?
Rahul Mehrotra: I don’t really see a big impact happening. Why because I think the increase in interest rates if it happens won’t be a big change. I also think that there is obviously an absorption capacity available from the various banks and credit institutions. It depends on how much they actually pass on to the customer. From this point of view, I do not see that customers will be affected much in terms of interest rates. It’s more about the threat of a third wave and their understanding that their cash flow will remain flat for recent times.
BT: Why do you say that the banks will be able to absorb any rise in rates?
Rahul Mehrotra: I’m basically from the corporate optimist group, and I can talk about my organization, and we’ve only passed on the rate increase once in the six to seven years. Otherwise, we have always absorbed all rate increases. From our perspective, I can clearly see that we won’t pass on any rate increases immediately, given that it won’t be much of a rate increase.
I feel like the bankers don’t really look at the overshoot because it’s a point where after two years you have an upside coming, there’s a lot of demand. And finally, we also see light at the end of the day for the real estate sector and if that happens and today if rates rise, then it will not be a good time to drive demand down again.
BT: Has there been an increase in demand for housing?
Rahul Mehrotra: There is a clear increase happening everywhere. It’s not basically specific markets like Delhi NCR or Mumbai region or part of Gujarat, even the south has come forward. If we compare, the type of queries that we usually receive, I think there is a clear increase of 7-8% compared to last year. I think we still have to be careful and see if the demand holds up, we’ll have a near 10-12% upside.
This mainly has to do with the fact that with the outbreak of the second wave of COVID-19 and all the lockdown restrictions removed by various members of government, demand is back. Whether you look at retail or capital goods, it’s more about spending, which also affects a lot of real estate. The segment is therefore currently experiencing very healthy demand.
BT: Is it a good time to buy a house?
Rahul Mehrotra: I think buying a home is obviously a long-term decision and the segment we usually operate on is a first-time buyer. In the affordable housing sector, it is usually their first home that they buy and take out a loan and we are proud to support these types of first-time buyers. Usually in this segment people are waiting for the certainty of their cash flow to happen and given that Omicron is right around the corner I think people are still clinging to the fact that Omicron shouldn’t cause any damage to the segment and the profits of the segment for which we serve. If cash flow continues for the next three to four months, we will definitely see 10-12% growth.
What are the biggest challenges for the industry?
Rahul Mehrotra: I think the biggest concern is obviously the availability of bank lines. Due to some defaults in the industry, bankers have become very restrictive in their lines towards HFCs and NBFCs. With COVID-19 gone, there’s a lot of positivity on that front, but I think we still need more support from the banks, so that HFCs and NBFCs can get regular lines that we have need to better serve our client because the lending company needs a very strong accountability strategy to survive.
BT: Are there any signs of over-indebtedness?
Rahul Mehrotra: I shouldn’t say I’m seeing overspending right now, but I’m afraid it’s happening. And my fear comes from the fact that our clients have come forward and there have been a lot of requests to increase the loan amount and some of the reasons are certainly genuine. For example, they said during lockdown you can’t move around properly so I want to buy a bike. So for this I need money because personal loans are very expensive in our segment. It is therefore always good to take out a loan against properties because of this much cheaper. But at the end of the day, if your cash flow, as I mentioned, is not forecasted correctly, you will definitely fall into this trap.
Also Read: Bank of Maharashtra Cuts Interest Rate on Home Loans to 6.40%