Real Estate Investment & Home Loans - Do a check before investing

Is this the right time to buy a house? Besides ones personal situation, the external factors that influence this decision are real estate prices and interest rates. On the home loans interest rate front, market signals are positive.

Most public sector banks have cut their benchmark prime lending rates by 0.75% to 12.5% effective January 1, 2009. The country’s largest mortgage finance company HDFC has also cut its lending rates by 0.5%. Even lending rate for home loans below Rs 20 lakh for both from state-owned banks and HDFC are cheaper.

However, there is still an uncertainty over the real estate prices. Builders are doling out freebies such as free registration, stamp duty waiver, free parking area or even a flat in another locality. But the rack rates have not come down.

“If there is indeed a genuine need for a home and the current market changes have resulted in the required affordability, one should go ahead and buy now. If the interest is more investment oriented, waiting till March 2009 might bring some better deals — however, this is a risk, since many add-on offers may no longer exist by then.” says Anuj Puri, chairman & country head, Jones Lang Lasalle Meghraj.

A couple of years ago buyers were scrambling to buy a house as prices rose every month. Now, the tide has turned. Buyers are waiting in the sidelines expecting the real estate prices to fall. “Prices will fall further in historically over-priced pockets until demand picks up. The rationalisation process should reach a peak towards mid-2009.” Mr Puri says.

So either the same house will be cheaper tomorrow or you can step up your budget so as to afford a bigger house. For those buying a house on borrowed money, it would be difficult to reconcile to a fall in real estate prices.

“For example, if the property value drops to Rs 75,00,000 from Rs 1 crore (at the time of purchase) then you have to pay a difference in the home equity to the bank. Otherwise the bank has a right to take the possession of your house,” says Swapnil Pawar a financial advisor and director Park Financial Advisors.

At the same time, lenders are now demanding that home buyers come up with a higher margin if they want a loan. “Property prices have been overpriced in the recent times. So there is scope for significant correction. Similarly, even the pay cuts and the prevailing uncertainty over jobs and pay hikes have necessitated extreme prudence in the lending business,” says a private sector banker.

Taking a speculative wait-and-watch stance should be a game of experts, who are also willing to risk a loss if they time their move wrongly. Genuine buyers should buy as soon as prices are affordable. After a particular phase in a career, the growth in income stabilises at 10-15%. That’s the best time to gauge the borrower’s affordability to buy a house. At times, couples often miscalculate their affordability.