Thinking of Buying a house now

In the bad old times not so long ago, only rich old families owned homes. Salaries were low and loans expensive, costing upwards of 15 per cent per annum. In the early part of this decade, home loan rates dropped sharply, and by 2003, you could get a home loan for as little as 7.75 per cent per annum (floating). Meanwhile, real estate prices had been depressed for five years.

Home buyers' ecstasy . . . Rising income levels and the boom in the information technology and related services sector made it possible for many families to buy homes.

"Sustained growth in the economy coupled with easy availability of home loans led to a huge demand for quality residential projects," says Maj. Gen. (retd) Jayant Varma, executive director (north), Knight Frank (India).

Younger and younger people began putting down money to buy homes, signing attractive home-loan agreements to fund the bulk of their investments. For the next couple of years, things looked great - salaries continued to rise, making EMI payments a breeze.

Inflationary home economics

In 2004, if you were planning to buy a two-bedroom flat in the suburbs of Delhi, it would have cost you around Rs 20 lakh (Rs 2 million). At that time, a 15-year loan would have come at 7.50 per cent. If a down payment of 15 per cent came from your own resources, so that you took a loan of Rs 17 lakh (Rs 1.7 million) to buy the flat, your EMI would have worked out to around Rs 15,759.

Today, the same property would cost you over Rs 40 lakh (Rs 4 million), and a 15-year home loan attracts an interest rate of 9.50 per cent. So, if you were to borrow Rs 34 lakh {Rs 3.4 million (again funding the 15 per cent down payment yourself)} for 15 years at 9.50 per cent, your EMI will work out to around Rs 35,503. This is just the cost of the house, other costs like registration will set you back by a few extra lakhs.

Are Things Going to Change Radically?

Real estate prices. Experts believe that select areas in metros are seeing a reduction in prices. "Delhi, Mumbai and Bangalore are indisputably seeing areas of correction. Property prices in Kolkata and Chennai might see a slowdown in the growth rate soon," says Anuj Puri, MD, TrammellCrowMeghraj.

In Mumbai, prices of residential units in Andheri and Goregaon are 20 per cent below their peak levels. There has also been a correction in Navi Mumbai and other suburbs. In some parts of the Delhi NCR region, prices have sunk by 15-20 per cent. In parts of Bangalore, residential property prices have gone down by 10 to 20 per cent.

However, the correction is not likely to be either sharp or deep - international experience shows us that most rallies in residential property end in a soft landing rather than abrupt drops.

Also, asset prices, including prices of residential units, tend to move in cycles. In India, this cycle has tended to move up for six to eight years before softening for another six to eight years. This particular uptrend is only four years old, so those betting on downward moves in housing may yet see higher prices in certain areas.

Home loan rates. As regards interest rates, they have firmed considerably in the last two years. From a low of 7.50 per cent in 2004, the rate of interest on a 15-year loan had climbed to 8.25 per cent by January 2006. This has now gone up to 9.50 per cent. What lies ahead?

"It is very difficult to predict interest rate movements. Though liquidity is strong now, it would be important to track factors such as inflation, growth rate and money supply to know the trend," says Rajiv Sabharwal, head, retail assets, ICICI Bank. Sameer Kaul, business manager, mortgages, Citibank, believes that "interest rates may continue to have a slight upward bias; however, it is difficult to predict how much higher they can go from here". At the same time, few think that we are likely to see interest rates at the historic heights of the 1990s.

Home buyers' emotion. The way we look at it, trying to second-guess the markets, whether in real estate prices or in interest rates, is a difficult proposition. While the speculator profits or loses directly with the rise or fall in real estate value, for home buyers, the special feeling of owning a house is more important than these notional gains.

Take the case of Neeru Kumari, 27, a Bangalore-based Chinese language specialist. Neeru lived in a rented flat in Bangalore. She calculated that renting was a lot cheaper than buying. Yet, she decided a month back to take the plunge and book her own flat. She made it easier for herself by taking a step-up loan, where her EMI will be Rs 17,000 for the first two years, before settling down at Rs 20,000.

Get more information