Should you buy a house now?

When the Reserve Bank of India (RBI) governor Y V Reddy sat down to announce the mid-term review of the monetary policy last Tuesday, there would have been enough people sitting at the edge of their chairs. While popular wisdom already had it that a no-news policy would be great news, builders, bankers and, especially, home buyers would have been hoping for some cut in the reverse repo to encourage a slash in home loan rates. But nothing happened.

The property market for one is disappointed by the development. As Dharmesh Jain, MD and chairman, Nirmal Group, puts it, "Even a small cut in rates would have signalled change in the momentum." Anuj Puri, CEO, Jones Lang Lasalle Meghraj, believes that a cut of 50 basis points would have definitely improved sentiment that no new hikes are on the anvil. But now the customer is going to be more worried that there could be further hike in the rates and thereby, higher equated monthly instalment (EMIs) payouts in the future.

This unsettling mood is best reflected by banks' non-food credit growth, which is down to 24.4 per cent (on July 6, 2007) from 32.8 per cent a year ago. Among these, home loans have been hit quite badly. Sources say that in 2006-07 one branch of a leading public sector bank in Mumbai which had disbursed 110 home loans has processed only 17 applications this financial year. And the simple reason for that is affordability.

Says Kapil Wadhawan, MD and chairman, Dewan Housing Finance, "Yes, it is worrying that a lot of consumers are being driven out of this market because they cannot afford the prices." Adds Puri, "Demand is down by almost 30 per cent in cities like Mumbai." But he is quick to come back with, "The supply, however, is so minuscule that there is not much that one to do."

According to Puri, a fall in demand to the tune of 30 per cent would have definitely brought down prices by at least 20 per cent in any market. But sheer lack of supply has helped builders to hold prices. Agrees Nirmal Group's Jain, "Till the time there is a way to augment supplies, there is no way that prices will come down."

Meanwhile, to improve  the sentiment during this festival season, many banks have cut lending rates by 50-100 basis points. But the result of these cuts is not very clear. "We have to wait for the next 30 days to see whether consumers are enthusiastic about buying," says Jain. Builders are also doing their bit by throwing in different kinds of offers like free cars, return of stamp duties and others.

Many see the freebies as an admission that there is some kind of correction happening or the builder wants to get rid of the inventory. Says a market expert, "Builders cannot pull down their rack rates simply because their other projects will get adversely impacted. So the only choice they have is to give freebies." And the goodies are often to the tune of 5 to 15 per cent of the property price. A good number indeed, if you are looking at a residence worth over Rs 20 lakh.

So where are we headed? There is clear consensus that except in pockets where the supply is plenty, it is doubtful that there would be any sharp correction. But the good news is there has not been any sharp rise as well. "I am happy with the fact that for the last six months the prices have been stable in Mumbai," adds Wadhawan. That means unlike the last two years when you were forced to make a quick decision of buying lest the prices went up next week, this time you can spend some more time thinking and choosing.

For prospective buyers, the advice is simple. Go ahead and buy because there is no indication of where the interest rate will be in the next six months. As far as property prices go, a lot hinges on this festival season. If there is good buying, then prices might continue to hold firm. If things go bad, it will largely depend on the holding power of the builder. Of course, there could be a case for correction, especially in areas where sales do not happen. But then timing the market is never possible.