Will drop in interest rate clear unsold stock?

Your ability to buy a house received a fillip after the recent move by the Reserve Bank of India (RBI). The real estate industry has already hailed the step taken by the RBI to cut repo rates by 50 basis points from 7.25 per cent to 6.75 per cent recently. 

But the question now arises whether it will help the industry to do away with slow sales, increasing unsold inventories, stalled projects and delayed construction. The unsold inventory levels in the major cities of India have increased significantly over the last few quarters. The dilemma facing the real estate sector is whether the rate reduction or cheaper capital will alone help to exhaust the piling unsold inventory or there is a need for rationalization of property prices to make them more attractive to buyers.

The industry is expecting that the banking and the financial system will play a vital role to revive the macro scenario of the real estate segment. The industry says that high bank interest rate is adding to the huge unsold inventory. They are keeping a close watch on the initiatives taken by RBI and are expecting the banks to pass on the policy benefits to the industry, which is quite low at the moment. 

The sharp cut in policy rates also indicates that the RBI Governor Raghuram Rajan understands that inflation is well under control currently. Since January this year (2015), the RBI has reduced rates by 125 basis points cumulatively, but only 30 basis points have been transmitted in the form of lending rates.

Real estate payers feel there is an urgent need for the banking industry to reciprocate and reduce the rate at which it lends to the industry as well as home loans to individuals. This is expected to increase property demand and sale in the market. But will the rate cuts help in exhausting the huge inventories that are piled up? There are a number of unsold properties available in the market at the moment. To exhaust this stock, only reduction in the bank lending rate may not help. Consolidated measures may well be required to do away with the stock.

According to a report by Knight Frank, “Currently, Mumbai has the highest number of unsold units in India, at more than 194,000 till June 2015. The National Capital Region (NCR) will take maximum time to liquidate its existing unsold inventory and take at least more than four years to exhaust the unsold inventory.”

“Surprisingly, Pune is one of the healthiest markets with the lowest quarter to sell (QTS) and comparatively lower unsold inventory. Kolkata has a QTS at the same level as Mumbai. Hyderabad has a high QTS and also suffers with a very high age of unsold inventory. The reason for high age inventory is that home buyers in this market prefer ready-to-move-in properties,” the report states.

To do away with the huge stock of unsold inventory in the coming quarters, there has to be some price rationalization as well in the real estate space. While property prices are stagnant at the moment, in most cases they’ve already reached a level of un-affordability for most buyers in that segment. Along with lowering of interest rates, price rationalization will increase the affordability of consumers or buyers and positively impact the real estate market.  

However, an analysis by the rating agency Moody says that the developers may not reduce price to boost sales, rather it will continue with their strategy to reduce the apartment sizes and offer freebies. It suggested that a solid economic growth would support the housing sales and reduction in lending rates will further boost investment in the sector.

The market scenario continues to be weak. Apart from Pune, home sales have fallen across the top eight cities during the first two quarters. The NCR witnessed the sharpest decrease in sales volume at 50 per cent during the Apr-Sep quarter of the current financial year. 

Only 14,250 residential units were sold in the NCR market during the period, which is lower than that of Mumbai, Bengaluru and Pune. Currently, Mumbai continues to retain the top slot among the top six cities for achieving the highest sales volume followed by Bengaluru and Pune.

The property sales growth can only pick up if there is an improvement in consumer sentiment. While lowering of interest rates will have a positive impact, it alone may not be able to address the problem of large unsold inventory and slow sale velocity.

The Unsold Inventory Levels in the top eight cities (H1 2015)

  • NCR: 191,000
  • Kolkata: 37,000
  • Hyderabad: 33,500
  • Chennai: 39,100
  • Bengaluru: 101,500
  • Pune: 64,500
  • Mumbai: 194,500
  • Ahmedabad: 41,400

*Percentage of total unsold inventory
Source: Knight Frank Report


Source - http://content.magicbricks.com/industry-news/will-drop-in-interest-rate-clear-unsold-stock/82998.html
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