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General Review
Indians are emotional people. We still cling to tradition in spite of the onslaught of the western culture, especially in those spheres where tradition can still demand a premium. Ask any man or a woman, especially from the middle and low-income group, what is that you would like to possess? The answer invariably will be a home, after a family.
A home perhaps has the highest emotional attachment after one’s family. Yet millions of Indians feel frustrated because their dream of owning a home does not materialise. The reasons are many and the principle among them used to be the high cost of investment, high interest rate for housing loans, artificial prices etc. No longer are most of these reasons really valid.
The housing sector is witnessing a resurgence, which it has not seen since the peak in 1995-96 and to some extent, to the end of 1997. Though it may never reach the dizzy heights of the years gone by, the following facts are relevant to understand the ground realities in the housing sector today:
The growth in the housing loan disbursement saw an upward trend of 36 percent in 1999-2000. If that was a significant increase, the reports of the first quarter this year are even more encouraging. HDFC Ltd, the premier housing finance company in the country has announced an increase of over 50 percent in loan disbursement in the first quarter of this year. The figures are reportedly about 45 percent in
Trivandrum.
Public and private sector banks have plunged into the housing loan sector and every day new schemes are being announced. This has brought in not only additional availability of funds for housing loans but also competition and better service, which is what one should expect. No longer should you feel bad approaching any housing finance company for loan. In fact, many of the HFCs come to your doorstep today.
Interest rates have never been so low as they are today. Compare the high interest rate of nearly 18 percent for housing loans in 1995-96 to as low as 11.5 to 13 percent today for a
Rs. Ten lakhs loan, which can be termed as affordable. The interest rates have not
bottomed out, a phrase used for housing costs, just a year ago. Add to this the variety of ‘goodies’, which the banks and the housing finance companies are offering, the choice before you for a housing loan is many. The competition to say the least is near cut-throat.
Aggressive marketing by banks and housing finance companies is another factor. ICICI Housing is literally setting new standards and is breaking some of the barriers in housing loans. SBI Home Finance is also trying to make waves. LIC Housing Finance has announced creditable results. Companies like Sundaram Finance have entered into housing loan sector. There are hardly any banks, which have not entered the fray so far. One can see increase in ceiling limits and increased loan re-payment period such as 30-year period, which are departures from the traditional maximum period of 15 years. You can pay the interest on a fixed or a adjustable rate and there are options for annual, quarterly or monthly or daily rests which means reduction in calculation of interest on the reduced balance outstanding against your housing loan account.
Realistic cost of dwelling units is another factor for increased housing investment. Gone are the days when artificially hiked up cost of houses was the order. With a fall of over 40 percent in housing costs in some of our Metros, prices in real estate market has indeed bottomed out to what one can call as acceptable costs. What you would have paid at over
Rs. 1600 per sq ft for a flat in prime locality in Trivandrum three years ago is available today for about
Rs. 1200. You get value for your money today.
Better pay packets are also another factor, which has given a boost to the housing sector. If the private sector offers higher salaries and perks to its employees, the Government’s disbursement of the Fifth Pay Commission arrears as well as increased salaries to its employees has made many of the Government employees to go in for homes. Even the ceiling on loan offered by the Government to its employees has been increased and consequently, there is a distinct increase in the number of government employees constructing their homes. In fact, many of the housing finance companies as well as Banks are targeting these employees and some have offered Group Housing Loans for employees of various departments. The market in this sector is huge and is yet to be tapped.
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Government Support
The demand and supply in the housing sector have generally been brought on an even keel and the prices of dwelling units have come to realistic levels. Competitions between the housing finance companies and banks have intensified and marketing of housing loan has become competitive with wide options being thrown at you. It is pertinent to point out that the Government too has not lagged behind and has done its bit for the housing sector.
The Union Budget for the past two years has considerably helped the housing sector. If the Budget for 1999-2000 allowed a maximum tax deduction of
Rs. 75,000 on interest repayment under Section 24, the Budget for the current year went one step further and hiked the limit to
Rs. One lakh. What this means is a cool saving of Rs. 33,000 per annum in Income tax or
Rs. 2750 per month, which one can save and use it for paying the EMI for his or her housing loan. Besides the period of applicability of this section of the Income Tax Act has been extended to those investing in a house up to March 31, 2003. The Budget also raised the Section 88 Exemption limit for repayment of loan from the Principal component to
Rs. 20,000 from Rs. 10,000. This has provided a further saving of Rs. 4000 towards calculation of taxable income.
These measures have made people to go for even a second house, just to save tax. The fall out of this is that the demand for those dwelling units is more, which would involve seeking a housing loan of about
Rs. 6.5 lakhs or so, for getting the maximum tax concession on offer. Hence many builders are actively targeting this segment and are trying to price the property in the range from
Rs. 6 to 8 lakhs or so.
Besides tax sops, on a long term perspective policy, the Government has amended the Urban Land Ceiling and Regulation Act, which needs to be approved by State Governments as well as the Rent Control Act.
Another important Bill awaiting Parliament nod is the amendment to the National Housing Bank Act, which would bring foreclosure laws into vogue. This would help the housing finance companies to successfully recover the loans from the defaulters. Presently this is a tedious and cumbersome process and such an amendment to the NHB Act will positively make housing finance companies extending loan to even low-income group people, who now find it difficult to obtain housing loan.
It is pertinent to mention that loan default for housing loans is insignificant when compared to the Non-performing Assets of the banks, which is assuming mind-boggling proportions. One of the main reasons for this is that a home is for the family and therefore unless circumstances go beyond one’s control, one does not default on payment of EMIs regularly. Besides,
losing a home, for which one has toiled to acquire, need for self-respect does play on the mind and the psyche of the borrower.
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Commercial Property
Investment in Commercial property is another option, which may tempt some to opt. The
return of investment on commercial property is higher as compared to the return on investment in a flat or a house. However, this depends on the market conditions and the economic growth in that particular city.
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Current Trends
Investment in a house is capital intensive. Yet it also provides security, especially in later stages of one’s life. What cost you ten years ago would cost you twice that amount today. Yet, if one or two decades ago, the average age of a man or a woman who thought of building a home was in the early or mid forties that trend has changed today. Younger people are going in for housing and especially those who are married and in their early thirties. The number of people in this age group is more, if both the husband and wife are employed. The incentives available today for housing as well as better salary and perks which the companies offer to the employees, a desire to create wealth and save on taxes are some of the reasons for the change in the trend.
In the past, many invested in real estate primarily as good investment as the returns were good. Some people invested as they considered real investment as ‘speculation’. With the real estate costs reaching realistic levels, the speculators have more or less vacated the field and today most of the investors are those who genuinely want a home for themselves. Therefore, the number of investors investing in a second or third home has decreased considerably.
The younger generation is definitely smart. If you one cannot pay to buy a house immediately, then go for a plot of land and build a house in a few years hence, when the pay and perks would be more. Some of them settle for a smaller apartment now knowing fully well that in a few years time this would fetch handsome amount, which they can use as down payment for their dream home. It also makes sense to go in for a flat or a house and pay for the EMI instead of paying tax and rent. If one works out the arithmetic carefully, the net outflow in terms of additional expenditure for payment of EMI would be offset by the savings in terms of acquisition of property as well as appreciation in the value of that property in due course of time. Besides such a move gives them security.
The generation of today in their twenties and thirties have seen their parents struggling to make both ends meet. As one grows up in age, the pressure increases because of expenditures for children’s higher education, marriage of daughters and other commitment in the family. Housing therefore was not a priority but one felt the necessity when one was about to retire. It is then realisation suddenly dawns that very soon you could be without a roof over your head or pay for it, which may not be affordable. Thus the need to go in for a house early in life does make sense. The younger generation of today has realized this simple truth rather early in life.
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Options Available
Today, one can hope to get different options for paying the EMIs for housing loan. If you belong to the younger generation and find that the EMI is not affordable, there are many options to choose from. HDFC gives you Adjustable Rate of Interest, where the interest is as low as 12.5% per annum.
Another option is to go in for a ‘step-up’ plan by which you pay less for the first few years and opt to pay more later during the loan period when you would also earn more money. However, the plan would make you pay slightly more over all for the loan which you take, which in reality gets off-set by the appreciation of the value of the property.
If you already have a housing loan for which you are paying a higher rate of interest, it may be well worth the effort to fore-close the loan and shift to the floating rate of interest, even if it involves payment of foreclosure charges. Incidentally HDFC does not charge foreclosure charges for floating rate of interest but only for fixed rate of interest.
For those in the higher age group of forty and above, it would make sense to opt for "step-down" plan whereby you pay more initially and less later towards your retirement age. This would help in off-setting cost of higher education or marriage of children.
If you are entitled to pension and other benefits at the time of retirement, some of the HFCs can work out a plan by which you undertake to pay some portion of the loan in one lumpsum from the pension benefits which would come to you. The remainder can be paid as EMI, which would decrease your monthly liability in keeping with the reduced income after retirement.
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Interest Rates on Housing Loans
Between 1995 and 2000, the drop in the interest rate for housing loan has been from 19 percent per annum to 11.5 percent. In 1995, you only had fixed rate of interest. Today you have adjustable rate of interest with no charges for foreclosure. You can now opt for step- up or step-down method for repayment of your loan. In 1995, these were unheard of. In 1995, you were offered 60 percent of the cost of the property as loan, subject to your repayment capability. Today you can hope to get 85% of the cost of property as loan. In 1995, you had the option of extending the loan period to a maximum of 15 years. Today you can go for a thirty years option. In 1995, the housing loan was being disbursed mainly by selected HFCs. Today banks have also entered the market in a big way and the competition is good. In 1995 EMI for
Rs. one lakh loan for a 12-year loan period was Rs. 1816. Today for a 15 years loan period and with adjustable rate of interest of 12.5percent, the EMI works out to
Rs. 1256 per month. Today, your salary scales are much higher than what it was in 1995. In 1995, the tax incentives available for housing loan were minimal. Today it is too good to be true. More importantly, property prices have dropped to acceptable levels when compared to the artificially hiked prices of the years gone by.
What do these facts mean? Simply put, you can borrow more money at less interest and consequently pay less every month towards your house and opt for a bigger flat or a house. More over, you get tax incentives for housing investment, which make sense to borrow and, not feel bad as one felt in 1995.
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Selection
of HFC for a Housing Loan
Interest rate and the method of computation of the interest are important factors. Lower the interest rate lesser is the drain on your pocket.
Look for a HFC who does not charge you for pre-closure of the loan. Some banks do not charge any penalty for pre-closure while some HFCs charge 1.5 to 2%. Some do not charge any penalty upto certain limit paid over and above the EMI every year. Some charge for fixed rate of interest but do not charge for flexible rate of interest. Processing fee and administration charges are levied by the HFCs. Some charge these as a percentage of loan sanctioned and some as a lumpsum amount. Some of them charge commitment charges if the borrower fails to draw the loan within a specified period.
Please note that you will have to pay pre-EMI on the loan amount disbursed until the entire loan is taken. This will add to your loan re-payment burden.
Look for the reputation and the service, which the HFC provides you. Even if one has to pay slightly more in terms of interest rate, it may be worth it, provided the HFC gives you quality service and has a good reputation and proven record in the market. It will save you lot of harassment and running around before your loan is sanctioned.
Look for transparency. Renowned HFCs like HDFC Limited have documents which you are expected to execute for the loan, where all the clauses are spelt out in black and white. Insist on seeing the terms and conditions from any HFC which you choose, so that there are no "hidden" clauses, which you may be, surprised with. Some of the banks that are new to the field of housing finance may not provide you with a copies of Offer Letter and Agreement etc, which are supposed to be given to you. Please insist on these documents and study it before signing on the dotted line.
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Property Investment by NRIs and PIOs
Non Resident Indians (NRIs) as well as Persons of Indian Origin (PIOs) have been major investors in property. The rules for investment of property for a NRI are same as for any resident Indian. In the case of PIOs who are of Indian origin but who hold any other country’s nationality, the rules for investment are slightly different.
In the beginning of nineties, a large number of NRIs invested in properties in India. Most of them were those who worked in the Middle East. However, consequent to recession in the Middle East for the past two years, their investment in properties has decreased. In fact, the slump in the real estate market in India was also the reason for many of the NRIs not investing in a second or third property.
However, with the IT boom, a large number of investment in properties are now being made by NRIs from the US and Europe. This market is huge given the kind of money the IT industry pays its employees.
NRIs are treated at par with resident Indians as far as housing loans are concerned, except that the payments are required to be made through their NRE/NRO bank accounts. They also pay lesser rates of interest for housing loan as compared to resident Indians and have a choice of terms of re-payment of the loan, which varies from 3 to 10 years. In the case of PIOs, they have to obtain the permission of the Reserve Bank of India and can repatriate the amount in foreign currency equivalent to the amount invested in a property. However, such repatriation is limited to the actual value in foreign currency brought in by them and is restricted to two residential properties only.
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Black Money
The use of black money for payments was very prevalent in the real estate field in India. It may be superfluous to warn the NRI investor of the dangers of accepting such risks. Even if an investor is not involved, he could be drawn into the problems of his seller. Fortunately, imaginative tax legislation is driving the real estate field away from black money. Also, computerisation and consequent extensive cross checking by the tax department has made it increasingly difficult to hide financial transactions. In fact, the current recession in India may partly be the result of thousands of individuals discovering that there is no safe place to hide black money. The population may need time to adjust to the concept that, just like death, taxes are inevitable. In the meanwhile, play it safe.
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Consumer Protection
Consumers in India can obtain relief under the Consumer Protection Act, 1986, which is a Central Act. Representation can also be made to the Monopolies and Restrictive Trade Practices Commission (MRTPC) for issuing instructions against unfair trade practices.
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Unapproved
Layouts by Developers
It is time that the Government stopped the menace of unapproved layouts by unscrupulous land developers. There is a need to amend rules and regulations to make it compulsory for the developers to provide basic infrastructure such as black topped roads, drainage, water, pipe lines, tree lined avenues and necessary arrangement for rain water harvesting and roof water harnessing. Only when these are provided should the plots be allowed to be registered and construction permitted. To protect ground water bore wells should be restricted to the
bare minimum and the Government must take measures to provide clean drinking water. These would also decrease the expenditure of the Government, which can then be used for maintenance subsequently.
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Stamp Duty
Each State in India charges has laid down its own rate for Stamp Duty. It is quite exorbitant in
Kerala and therefore, people try and circumvent the payment of stamp duty by registering the property at lower value than the market value. By reducing stamp duty considerably and proclaiming actual market value and charging stamp duty for the same, the Government will only be a gainer. With computerization of land records, this should not be a problem at all and can be done quite easily.
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Cement Cartels of Tamil Nadu
For the past two years Kerala is witnessing a phenomenon, which does not happen elsewhere in India. In a market free economy, it is indeed strange that cement prices should be almost double the price of cement in neighbouring states of
Tamil Nadu and Andhra Pradesh. Strangely this happens periodically. Obviously this happens because the cement manufacturers with support from the right quarters hike the price periodically to make more money and balance their books. At a time when the construction industry is looking up, this sort of unprecedented price hike is least warranted and has the makings of a big scam. Unless the Government breaks this unethical practice by the cement manufacturers with active support of higher ups in the Government echelons, construction industry will suffer and consequently what ever
Kerala tries to achieve in the industrial field would come to a naught.
During October 2000, the cement manufacturers association has implemented
a self ban on direct supply to projects thereby creating an artificial
scarcity and subsequent pushing up of prices.
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Real Estate Scene in
Trivandrum
The real estate market in Trivandrum was badly affected during the past
four years. The recession was the main reason for the sluggish demand. However, it was in keeping with the general trend in the real estate market across the country and like other cities in India,
Trivandrum also saw a decline in demand and consequently a retarded growth. Prices fell to more realistic levels than the artificial hike in costs, which one witnessed in 1995-96. Added to
this was the general sluggishness in the industry and the poor money market
conditions and consequently the real estate market also suffered.
According to HDFC Ltd, the demand for housing loans in the first quarter of this year has risen by 45 percent in
Trivandrum as against the all India levels of over 50 percent. This is not bad at all and shows that
Trivandrum is still the favoured destination of many who belong to Kerala and who work outside
the state, especially in the Gulf. The climate of Trivandrum , people and the fact that the city has not yet reached the degradation levels in terms of the infrastructure facilities and pollution levels like some of the metros, do make many to opt for
Trivandrum as their favoured destination to settle down. Consequently, many prefer to build their homes in
Trivandrum with the aim of settling down after the retirement from their present jobs all over India.
Ironically, there has not been any new project for flats in Trivandrum even though most of the flats, which had remained unsold for nearly two years, have been almost sold. Yet the demand for housing loans have gone up. This is because many prefer independent houses to flats and those, which they can afford. The demand for villas and small bungalows is significant and builders
who offer such houses at affordable cost and provide some amenities, the demand is good.
It is also pertinent to mention that multi-storied flats take time to complete and the completion of any such project is dependent on demand and good bookings, since the progress of construction is directly proportional to bookings and flow of money. If either of these should stagnate, as was the case in the recent past, the project completion gets delayed and those who have paid the money do not get the possession of their flat until others have paid or the bookings have been completed. This is not so for bungalows and villas as its completion is not dependent on others.
Another reason for low demand for flats is that flats normally come up in city centres or those localities which are close to the centre of the business or commercial
activities. The demand for flats is directly dependent on the growth of industrial activity or the economy. In
Trivandrum no new industry worth its name, including the Information Technology (IT) industry have come up in the recent past. Therefore, the demand for flats especially for those employed by the industry has not been much. Since the demand was not there and for the reasons mentioned above,
only few new construction of flats has been launched so far this year.
This trend could change with the news about many IT companies viewing Trivandrum as a possible IT destination. The recent facilities
are expected to provide a conducive atmosphere for software exporters. Besides
the excellent educational facilities in Trivandrum as well as pioneering effort in such IT related business like medical
transcription, disciplined labour, abundant manpower, both skilled and unskilled are pointers to the potential that this city holds in the coming days.
The prevailing growth in the industrial climate indicates growth in commercial property in this city. Presently
a major commercial complex - JAMY
PLAZA by Jamy Builders & Enterprises (P) Ltd. is coming up in
Pattom - Medical College Road opposite to Vydhuthu Bhavan.. The construction
of the commercial complex by Jamy Builders & Enterprises (P)
Ltd. is progressing at a fast pace. Book early
and avail special price offer.
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