LoanRaja Blog- Personal Finance Guide

Someone once observed that real estate prices can never fall. There is only so much land in the world to sell real estate, and being a scarce commodity in that sense, demand and therefore prices of land, can only go up.

Yes, there will be some ups and downs, but the land market will never crash. And in the long term, investment in real estate – land and property — can only be profitable.

However, like someone also said, in the long term, we are all dead anyway, and it is the short and medium term that affects us the most.

And in the short term, buying ability, construction prices and interest rates determine property prices to a large extent.

Right now, the Indian property market or Real Estate per se is seeing some interesting swings. For a while, it seemed as if prices would continue on an upward spiral, and a house/ flat for Rs 1crore became matter of fact.

And then, the RBI struck. Loans to housing became stringent, interest rates went up and home buyers found life tough.

Now, it is the turn of the developers to struggle. On the one hand our land prices are still high, and on the other the falling prices of homes, with home loans once again getting priority; which would mean there is still much scope as far as Real estate is concerned.

But buyers are still cautious and are refusing to bite. Buyers are skeptical to invest may it be in real estate or in any other investments. Banks too, have yet to start looking at home loans again, despite directions to do so from the Government of India. In an attempt to get the segment back on track, developer associations such as CREDAI and the National Real Estate Developers, Council (Naredco) have both urged members to cut prices on properties. Developers, who are strapped for cash, are dangling various freebies, incentives, and easy payment options.

So the obvious focus for real estate seems to be the middle and low-income group housing schemes. The high-end homes are already in oversupply. Even commercial property is lying vacant. The only serious house buyers are these looking for a roof over their heads, rather than those looking at real estate as an investment option.

One other area that is expected to gain popularity during a slowdown is the affordable or low cost housing segment – which includes homes between Rs 3-20 lakh. This is attractive to the buyers – because of the lower prices and attractive to developers, because their initial investment can be a little lower, a boon in times of a funds crunch like now.

Once demand picks up, the construction industry thereby real estate itself is expected to revive.

The next few months will see a correction in rentals – a trend that has already set in. Rents have gone down anywhere between 10-50 percent, depending on the location. In the meantime, there is a lot of vacancy – in high-end luxury apartments, as well as office space. Companies too are putting off real estate decisions, waiting for conditions to improve before making any new investments.

One point of view is that the slowdown has only been a means to bring about a correction in real estate, bringing it down to more realistic levels. Developers will continue to find it difficult to raise funds and prices are expected to fall by at least 10-15 percent over the next 6-9 months.

Investment in real estate remains a good proposition, as long as it is direct investment. Real estate equity funds have taken a beating. A lot of private equity finds from investment banks that they are not in good shape either, in the wake of the global financial crisis.

Last week, the Government said that liquidity crunch was the biggest problem facing the country today. The RBI also acknowledged that the global crisis is hitting India far deeper than was expected. Little wonder then that a flurry of announcements have been made, all aimed at easing the liquidity crunch and increasing credit flow.

The current credit crisis itself happened because lending rules became tighter and interest rates were hiked as Government attempted to stem inflation (caused largely by the increase in the global price of crude). Credit is the backbone on which trade functions and the lack of credit (coupled with the decrease in demand) has led to the drop in industrial production.

Now that crude prices have fallen and inflation is down to 8.98 percent, the RBI has seriously turned to the issue of increasing credit flow and reviving the economy. The RBI announced CRR cuts twice this month; cut repo rates by 2 percentage points and in its latest set of announcements it has increased the ceiling on NRE (Non resident expatriable) deposits in a bid to attract funds from abroad.

Targeting revival of the real estate sector, NBFCs and capital markets specifically, it has tried to increase the flow of credit to these areas. The risk weightage attached to the real estate sector has been brought down and provisioning requirements on residential housing loans, commercial real estate and loans and advances qualifying as capital market exposures have been reduced.

Liquidity measures in place; now it is turn of credit flow

The real estate sector and the SSI sector are particular concerns for the government, as they are both highly labour dependent and any slowdown in these two areas will be followed by large scale unemployment. To infuse funds into these areas, the RBI has come out with a Rs 2000 crore package to finance SSIs through SIDBI, and a Rs 1000 crore package to NHB. Housing finance companies registered with NHB have been allowed to raise short term foreign currency.

NBFCs and mutual funds can now avail of a special repo rate up to March 2009.
The RBI has also announced a longer period of concessional pre-shipment credit for exporters of 270 days, compared to the earlier 180 days. But it is debatable how far this will help because the real problem for exporters has been the drop in demand.

Going by initial indications, these announcements will take time to translate into anything tangible for the common man. The markets, for one, have not reacted with much enthusiasm to any of these measures. Banks too are not expected to jump at the prospect of lending to the real estate sector as the cost of finance has gone up in the last one year.

Last year’s inflation control measures and attempt to bring down exposure to the real estate sector backfired. Rather than decrease exposure, banks simply raised the interest on deposits and continued to lend at higher rates. To bring down lending rates right now is not a very attractive proposition.

Banks did not react to the earlier set of measures to infuse liquidity in October by increasing lending; they bought government securities instead. So credit flow to the sector will happen only when the banks get over their reluctance to lend to housing sector once again.

In the longer term, banks will have to come back to the customers, interest rates will stabilize and people will begin to buy houses again. Even now, home loan companies assert that loan off-take among the middle and lower classes (who want to have a house to live in, opposed to buying a house as in investment) has not really come down.

The drop in inflation and the cut in crude oil prices have also not brought immediate cheer to the common man. The Consumer Price Index is not expected to drop any time soon. The crude oil price cut is expected to be passed on to the consumer only after oil companies have made good their losses.

We will have to wait for the banks to get over their concerns to begin lending and improve industrial confidence to finally see the effect of the measures.

Credit cards are one of the few products which have dedicated users and aggressive critics. While those who use it efficiently swear by its comfort, those who have been put to discomfort, don’t miss an opportunity to blame the plastic money for their financial problems. Are credit cards then a product which can land you in a mess eventually? The answer, obviously is NO provided you understand its nitty- gritty. In fact, just understand the fine print associated with your credit card and chances are that you will have lesser opportunity to make it a scapegoat for your financial troubles.

There are two important dates for every credit card user as the product’s entire dynamics revolves around these two dates. One is the statement date and the other is the payment date. As a card user, if you manage to remember the statement date, it will do a lot of good as you can effectively use your credit card. As the name states, this is the date on which the card company generates a statement of all your transactions. Hence, the credit card bill amount will be the sum of all transactions made from previous statement date to the latest statement date. Now, why should you remember the statement date?

Let us assume that the statement date of your credit card is 10th of every month and payment date is 30th of the same month. If you make a purchase on your credit card on 9th or 10th, chances are that you will be required to make the payment during the same month (as per payment date). That would mean you can enjoy a free credit period of only a maximum of 20 days. Instead, if you had made the purchase on 11th of the month, your purchase transaction would be after the statement date of the same month and hence would get reflected in the statement of the following month. Since the payment date is on 30th, you would effectively enjoy a free credit period of 50 days! Now, such smart shopping can be done at least for big ticket purchases though you can’t really plan your restaurant or movie ticket bills. However, a good memory of statement date surely will come in handy as you can make a better use of your card.

Even if you are unable to remember the remember statement date, make sure to remember the payment date as missing this date with respect to this date can land you in trouble. Credit card companies are pretty severe on defaults and can slap you with hefty charges. As you would have noticed, the interest rate on credit card outstanding amount is pretty high and in recent times, has gone up to as high as 50%. In addition, card companies also charge late payment fees if the statement amount is not paid on time. For those who struggle to remember the due (payment) date, ECS (electronic clearing service) is the best option. Generally, credit card companies will debit the bank account on the payment date. If the account does not have the required amount, the minimum balance would be debited from the savings account.

And finally, make it a habit to keep your credit card spends according to your ability to repay. Sure, credit card allows you the flexibility of paying only 5% of the statement amount but the flexibility has a huge price as the card company will slap an interest on the entire amount even if you pay only a portion. This interest would be as high as over 4%on a monthly basis and if you take into account other charges, the final penalty will be over 50% per annum. All this of course, can be avoided if you get into the habit of clearing the entire statement amount by the payment date. That will also help you realise that credit card is a product which allows you to enjoy free credit for a certain period.