Downward march to new heights

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Home loan interest rates have created another historic low. Union Bank has pushed down the interest rate below the psychological 6.5% to 6.4%. The lowest rate was 6.5% so far with as many as 14 banks and NBFCs offering rates below 7%. The latest move might prompt other lenders to drive down rates even further to grab market share and, in the process, unleash a race towards an unbelievable 6.25%. Real estate developers will love this supply-side push that will help the average home buyer to buy his/her dream home at a lower EMI.

The redeeming feature of the move is that like automobiles, real estate is one of the few sectors that can pull up a few other sectors such as iron and steel, cement, paint, electricals and home décor items. All these sectors are themselves labour intensive and have numerous units that work as vendors and suppliers that would also benefit from a rise in their fortunes. Real estate is also an extremely labour-intensive domain that employs a huge number of people from the bottom of the financial pyramid, especially migrant workers from rural areas. Due to the pandemic, this segment was one of the worst hit since mobility restrictions and distancing protocols prevented labourers from joining construction activity. With vanishing jobs, slashed salaries and dimming outlook, buyers, too, disappeared leaving a huge inventory with developers.

After the first and second waves, in order to boost demand in this crucial sector, various state governments undertook a slew of measures such as reduction of stamp duty for property registration and cutting down circle rates. States such as Maharashtra and West Bengal reported a jump in demand.

Cheap finance can go a long way in raising demand for real estate. Even a few years ago, home loan rates below 7.5% was quite unthinkable. Even in 2015, the largest bank in the country was offering home loans above 9.5%. Union Bank’s step might unleash a rate war towards 6.25%. Besides applications for new loans, borrowers might rush to lenders who are offering lower rates to transfer their existing loans.