If you are putting your money somewhere then Real Estate is the place. This is what most of the people might be saying in India. The way the reality sector has been performing and the way the property prices are soaring up, every one is comming up with some real-estate or infrastructure project in India. And those who are not comming up with projects are investing in them.

People are borrowing money from the banks at low interests rate and buying houses from the developers or investing in commercial projects. I work for one of the real-estate developers in Delhi and i observed that most of the people buying houses are young executive couples like us. Banks also prefer lending money to them.

According to a report in the Economic Times, the home loan portfolio of a large private bank shows that in 2002-03, the percentage of those taking home loans in the below 30-year age bracket was 13 per cent and it was 47 per cent in the case of those over 40 years of age.Last year, the share of below 30-year age group in the total home loan pie rose to 24 per cent and that of the 40-plus age group fell to 34 per cent.This has also brought a consideratble demand in this sector.

The way the real estate prices have gone up substantially over the past one year, this has brought in speculators into the market along side the genuine buyers. And somewhere down the line, the lobby of investors and speculators who pump in the voluminous amount of money into this business and buy the available properties in bulk shooting up the prices like anything thus widening the gap between demand and supply. These investor manipulate the prices in the reality sector and drive the market.

Recently RBI also launched a two-pronged attack to deflate the bubble in the real estate sector. The provisioning norms for standard home loans above Rs 20 lakh has been raised from 0.4 per cent of assets to 1 per cent.This means, instead of keeping 40 paise aside for every Rs 100 worth of standard assets, the banks will require to set aside Re 1 to create a cushion of safety.

The risk weight for real estate loans, too, has been increased from 125 per cent to 150 per cent. The banks will now require more capital to build such assets. Naturally, the cost of home loans, which has already started going up will rise further.

The twin-move, outlined in the annual credit policy, follows another restrictive step taken by the regulator to rein in the exuberance in the sector. A few months ago, it had barred commercial banks from lending to any real estate projects unless all necessary approvals were in place.

The Real-estate market is growing at a phenomenal pace. In the first nine months of 2005-06, ICICI Bank disbursed Rs 17,600 crore (Rs 176 billion) of home loans against Rs 18,874 crore (Rs 188.74 billion) in the whole of 2004-05.

The Housing Development Finance Corporation disbursed Rs 13,805 crore (Rs 138.05 billion) during April-December 2005, against Rs 16,206 crore (Rs 162.06 billion) in 2004-05.
According to one estimate, the housing finance industry has grown from Rs 28,720 crore (Rs 287.2 billion) in 2001-02, to Rs 60,354 crore (Rs 603.54 billion) in 2004-05, and is expected to touch Rs 80,000 crore (Rs 800 billion) in 2005-06.
Another estimate by a consulting firm pegs the home loan market at Rs 1,35,000 crore (Rs 1350 billion) in 2005, and says it has been growing at 48-49 per cent over the past five years. The report also says that banks have outpaced the housing finance companies in home loan growth.

The reasons for this growth are many – ranging from low interest rates to tax benefits, rise in disposable income and, of course, the burgeoning middle class. According to an HDFC estimate, in 1995, the cost of a flat was 22 times the annual salary of a home buyer. It came down to 4.6 times last year. There has not been any drastic change in the scene despite the hardening of interest rates, as people’s purchasing power has not been dented. The interest rate on home loans came down to as low as 7.25 per cent in 2003. Since then, it has gone up to about 9.5 per cent now.

The RBI must nurture the mortgage market with great care and not stymie its growth.

(With inputs from Economic Times)

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