'Freebies Are Offered Instead Of Price Cuts'

Is the real estate boom over? Have prices started to flatten out?

Indian real estate is witnessing a much-needed cool-off. Without doubt, realty prices are at their peak and a correction is inevitable. However, it would be wrong to expect a sudden crash. We expect the downward trend to be gradual and concentrated in certain pockets. We understand several developers have already started witnessing a slowdown in sales. It now depends on the holding capacity of a developer. In fact, instead of reducing the prices outright, some developers are offering freebies like interior decoration, free air-conditioners or other consumer durables. Some of them are also willing to pay the first six equated monthly instalments (EMIs) of the mortgage loan.

How much of this is driven by high interest rates?

Interest rates per se do not deter the actual users who want to buy a property for their own use. Interest rates are cyclical in nature. It is property prices that tend to impact the buying decisions more than interest rates. HDFC has always catered to the middle-class segment. Even today, our all India average loan size is about Rs 12.5 lakh. Moreover, about 95 per cent of our customers are actual end-users, thus we have not seen much change in demand.

Could you quantify that...

Our home loan approvals and disbursements for the first nine months of the year ended December 31, 2007, grew by 30 per cent and 28 per cent respectively. Though property prices are high, the affordability today is much better compared to a decade ago when a house cost over 20 times an individual’s annual salary. Today, it has come down to just over 5 times an individual’s annual income. And, the continuing correction in property prices would lead to more end-use property buyers and hence more home loans.

What about speculative buying?

One did see investment or speculative demand in real estate. People held assets with a view to sell them at a profit at a later date. However, we have been seeing such demand move out. Builders are already complaining of sales slowing down. Going forward, as these investors or speculators realise there is no further upside in real estate prices, they will start selling out. There will also be people who have been affected by the stock market meltdown, who will need to sell out their real estate holdings to make other investments. Such factors should bring rates down.

Will this lead to builders shifting focus from high net worth housing to middle- and low-income groups?

In a bid to overcome a huge drop in builders’ sales, there has been a shift in focus to affordable housing to cater to the average Indian middle class. Some state governments together with developers are working towards shifting the focus back to ‘affordable housing’. Several leading developers like dlf, Kalpataru, Akruti City, among others are also seriously considering providing affordable housing for the masses.

Looking ahead, how will interest rates move?

About three months back, everyone expected interest rates to move down and HDFC did take the lead in reducing its PLR from February. The financial markets have changed dramatically since and if this continues, I think there will be a marginal increase.