Role of home loan and other financial facilities in the growth of Indian Real Estate sector
Real estate sector in India is the dark horse of the booming Indian economy. And this boom owes its privilege to the tax incentives given to the housing finance sector in the annual budget of 2001. Transactions related to buying and selling of residential properties increased considerably and was much higher as compared to previous years. However, commercial property investments remained passive due to weakening economy, unrealistic property taxes resulting in high vacancy and falling prices. It was time when India properties needed to climb new heights and become a vital sector to kick-start a stagnating economy. At such a point buyers required loans to buy the property of their choice.

The buyer of a real estate property could be of different types - corporate, individual, trust or a group of individuals. But the common requirements of all these buyers are funds. The need for loans is taken care of by specialized housing finance companies, foreign banks and nationalized banks spread across the country that are set to play the most important role in the development of the real estate industry and are the end users. The government is required to address the needs and expectation of these players whose mortgage-backed securities would enable housing finance companies in India to raise funds at cheaper costs from capital markets and provide another investment tool for investors. Housing finance companies are allowed to raise funds from the market in the form of fixed deposits and bonds with tenure of not more than 7 years.

Housing loans available with ease
In the current economy of India, the real estate sector has the maximum propensity to generate income and demand for materials, equipment and services. There is a need for creating conducive environment for property transaction. The current crisis faced by the people involved with the real estate sector, be it the realtors, investors or the housing finance companies is the shortage of funds and non-existence of efficient legal frame work. It can be said that housing finance companies were formed to cater to the co-existing buyer’s requirements of home loans for investing in properties. Home loans in India are made available by financial institutions to both Indian and NRI customers at floating and fixed rate of interest and also at attractive EMI options.

for construction or buying a new home
for home repairs and renovations
for purchase of plots
against mortgage of property

These customized facilities of availing home loans for properties has lead to the growth of the Indian realty sector and with support from the government in terms of sector friendly laws, this sector certainly has the ability to contribute to GDP growth substantially contributing to boom in India’s global economy.

Real estate crash and rising interest rates
Academically rise in interest rates affect the price of real estate in two ways. One, the higher interest rate on home loans would increase the monthly installment. The effect of 0.5 percent change in rate of interest get multiplied manifolds when its compounded effect is calculated for a loan of 20 years. Second, because of higher bank rate, liquidity in the market goes down and which in turn reduce the investment in real estate.

In last two years, real estate prices skyrocketed 80 to 400 percent. A flat costing Rs 18 lakh in Gurgaon , now costs around Rs 45 lakh. Because of hardening interest rates on home loans ( rose from 8 to 10.5 percent in last two years), the middle class is finding it difficult to afford a house and in past six months demand of properties has substantially gone down.

Rise in petrol prices and other commodities have further put the pressure on monthly budget of middle class, forcing them to postpone the purchase of house. The interest rates are further expected to rise in future and also most of the banks have already met its 25% of total lending to the housing sector and would be unable to increase the loan in housing sector. In order to discourage speculative investors in real estate, RBI has directed the banks not to lend without verifying government clearances and also increased the risk weight of real estate.

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