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.

Earlier a status symbol and now an integral possession of every wage earner and self-employed person in urban areas, the ubiquitous credit card is a pointer to the rising consumer spending in India. Aggressive campaigns by banks and NBFCs over the years to cash in on the burgeoning middle class consumers’ itch for ‘buy now pay later’ led to a phenomenal rise in the penetration of the plastic money. Foremost advantage of a credit card is its mobility. For shoppers and travellers, choice of a credit card is a matter of convenience. The cards have increased the purchasing power of the individuals and the younger generation is on a shopping spree.

Basically credit card operations rely on four players. Visa, Master, Diners, American Express and JCB are the providers. The second group comprises of vendors or the respective banks and financial institutions, which issue cards on behalf of the providers, like ICICI, HSBC, Citi bank, SBI, HDFC, Standard Chartered etc. Then come the cardholders. Lastly there are shop owners or any other establishments that accept the cards from the holders and honour the purchases made by them or the service rendered to them. Many cards have special features like accident insurance cover to make it attractive. Good customers get rewards too.

Strict terms

It is easy to get a credit card if you can provide the bank /NBFC proof of identity, address and income. Before taking the plunge compare the terms offered by different banks and make a wise choice. Watch out for any hidden charges. Ignorance of some of the charges levied can prove costly later. Terms, which used to be stringent, have been liberalized. Along with attractive offers to lure customers towards their credit card banks also set some strict conditions for non-repayment, penal interest and late payment charges. All bank websites display the dos and don’ts of credit card use. These are also given on the reverse side of statements. Besides customers get email alerts also.

A credit card customer normally enjoys a free credit of 50 days and the shopkeeper gets his payment from his banker as soon as he presents the statement of the purchases made. The bank then sends the vouchers to their respective head offices or clearing offices where the money is collected from banks that have issued the cards. The whole operation takes about three weeks whereas the credit enjoyed by the customer is much more than that. Credit-free period is the time given by a bank to a customer to make payments on credit card purchases without having to pay any interest. If wisely used, credit card can be a source of interest-free working capital for a self-employed person.

Cash withdrawals

If you have an urgent need for cash you can swipe the card to draw cash. You have to consider this as the last resort since this facility is accompanied by some harsh terms. Every time you draw cash you have to pay a minimum service charge of Rs.500. The interest also is higher. Repayment of cash withdrawal also is a complicated process and you can fall into a debt trap. Credit card is short-term credit, which is costlier than a personal loan. Banks charge high interest rates of over 36% per annum on credit card debt, as it is unsecured. Delinquency rates are high. In default cases there is a high degree of write-offs.

Before selecting a credit card the customer must be clear about all fees a bank is charging. Compare the rates of different banks first. Credit cards have different types of fees like joining fee, annual fee, renewal fee, add on fee, card replace fee etc. Prompt payments can avert problems. If you pay only the minimum balance you may have to pay interest on next month’s bill also. RBI has clear guidelines to make credit card operations transparent. The terms and conditions on credit card must be clearly conveyed to the customer and banks are barred from collecting any fee other than what was mentioned at the time of issue of the card. There are ample avenues for grievance redressal.