The last few quarters have been quite tough for the people dreaming of buying a home. The interest rates on housing loans have gone up from the 2004-05 levels. Many people thought that property prices will come down significantly due to the rise in home loan interest rates. However, contrary to expectations, property prices have never come down significantly, and in fact, have gone up in many areas.
So what affects property prices?
Some factors that dictate property prices:
Rise in input costs
With the inflation ruling high globally (especially here), the prices of all basic commodities has increased quite significantly over the last few quarters. For example, the cost of labour, steel and cement has gone up quite significantly in the last few quarters. Due to higher input costs, builders cannot reduce property prices in their newly-launched projects.
Investments by foreign investors
Many foreign investors believe that there is huge potential in real estate and the returns will be quite attractive. Foreign direct investments in realty projects has increased quite significantly over the last few quarters as more foreign players are investing in real estate projects here.
Should you defer purchase?
Experts suggest that investors willing to buy residential properties should not wait. It is better to invest at current levels. The inflation rate is ruling at quite high levels (above 11 percent) and is expected to remain high in the short to medium term. This means the rise in input costs of properties will continue and builders will be forced to raise the property prices in future.
Also, home loans attract income tax incentives for the borrowers. This means it is good to invest early in property. However, investors should factor in some variables while going in for a home loan. As a home loan is a long-term commitment from the borrower, it requires proper financial planning. Typically, a home loan tenure is 15 to 20 years.
Some factors to consider while availing a home loan:
Scheme
First of all, a borrower needs to decide on whether to go in for a fixed or floating interest rate home loan. Usually, the rate of interest is 1-1.5 percent higher in fixed interest rate options. Borrowers with stability of income can go for the floating rate option while the risk-averse should opt for the fixed interest rate loans.
Plan finances
Due to the higher inflation rates ruling globally, the Reserve Bank of India (RBI) is bound to take tough monetary policy measures. As a result, interest rates might go up in the near future. Investors should factor in some interest rates hikes while calculating their equated monthly instalment (EMI) outgo. Usually, banks absorb small interest rate increases by increasing the tenure of the loan. However, in case of sharp rises in interest rates (seems unlikely from current rates) investors can look for partial pre-payment and partial increase in the EMI outgo.
As a thumb rule, the EMI should not be more than 40 percent of the borrower's take-home income. Also, since a home loan EMI is a long-term issue (usually 10 years or more), investors need to plan other expenses like child's education, marriages in the family etc and adjust their outflow accordingly
Investing in property
- Invest early in property
- Home loans attract tax incentives
- Factor in some variables while availing a home loan
- Decide on fixed or floating interest rate home loan
- Anticipate interest rate hikes while calculating EMI
- In case of sharp interest rate hikes, look for pre-payment and partial increase in EMI outgo
- Plan a reserve pool for other expenses and commitments
