Is House Price Or Interest Rate More Important?

Property buying is triggered mostly by a fall- either in property prices or the housing loan interest rates. Thanks to demonetisation, one has already happened. Owing to the high cash reserve ratio, banks have cut interest rate on home loans making them cheaper by up to 8 per cent, home prices have failed to trigger sentiments in home buyers who are still on the fence about investing in property. This has led to a vital debate between the industry stakeholders that whether cheaper home loans are enough to fulfil the mission of Housing for all 2022 or we have to look beyond the obvious to make it a workable plan. Here's the complete story-

How low-interest rate impacts property buying?

Low-interest rate implies cheaper home loans and less interest to be paid to the banks. As the amount paid to the bank has higher interest component than the principal part, lowering of lending rates leads to higher savings for the buyer. For instance-

Suppose your loan amount is Rs 50 lakh available at an interest of 10% for the tenure of 20 years, the total interest payable is Rs 65 lakh. Whereas if the same amount is loaned at the interest rate of 8 per cent for the same tenure, the component payable as interest will be Rs 50 lakh. The impact is also visible on EMIs as in the former case the monthly instalments were close to Rs 48,000 while in the latter the EMIs came down to Rs 40,000.

While experts have always pointed out home finance as one of the biggest setback for Indian real estate as some countries offer credit as low as 4%, it will have little impact on those buyers who intend to purchase a bigger home as the cost of property would still remain stagnant.

What if property prices come down?

Cheaper homes would mean a lesser burden on the pockets and less external borrowing. Considering that down payment remains 20 per cent of the property value,  it would be easy for any buyer to arrange the rest of the funding for buying a home and to afford it with easy on pocket EMIs. For instance-

Suppose you want to buy a property worth Rs 50 lakh for which the loan amount is Rs 40 lakh. With an average interest rate of 9 per cent for 20 years, the total EMI would be Rs 36,000. The total interest payable is Rs 46 lakh. Whereas if the property you want to buy is available for Rs 40 lakh for which the loan amount is Rs 32 lakh, the interest payable is Rs 37 lakh and the monthly instalment would be Rs 28,000.

In this case, the buyer is saving on the down payment, on the interest component as well as on the EMIs to be paid. While the interest rate assumed is less than the prevalent rates, the total savings are almost comparable in both the situations.

The bottom line

While both of these factors are equally important for making the dream of housing for all a reality, each of these is variable of other. Slashing interest rate with price correction would make a stronger impact than any other policy change. Home loan interest subsidy, affordable housing, easy finance are some of the initiatives that will catalyse the change soon enough. While the government is committed to make home buying a pocket-friendly experience, policy makers have to frame rules such that even the lower middle class take a step to own a shelter of their own.