Home loan demand declines, bankers blame property prices

September 7, 2007: After suffering substantial declines in the demand for home loans in India, banks have blamed the rising property rates as a reason behind the slash.

However, the decline has been attributed more to the home loan interest rates that have been rising incessantly for the past couple of years. As per the recent reports of Associated Chambers of Commerce (ASSOCHAM), rise in home loan rates severely affected the housing sector as their growth has fallen to 26.6 percent in 2006-07 from 29.1 per cent in 2005-06.

Notably, the interest rates on home loans rose from 7 per cent to 12-14 per cent in the past 5-years that made the lending largely unaffordable.

The bankers although disagree. According to the general manager of ICICI Bank’s mortgages and real estate division Sunil Rohokale, real estate prices have almost doubled in most parts of the Western India while the same holds true with the Northern and Southern part of the country as well.

Thus, such a hike in property prices is a major detriment behind the fall in home loan demand.

Definitely, the rise in real estate prices may have impacted the banks, the effect of rise in interest rates can not be ruled out. The Assocham report referring to differential between Equated Monthly Installments (EMI), prevailing at 7% and 12%, says that approximate change in EMI for housing loan of Rs 10 lakh works out to be Rs 3,250 and puts an additional burden of Rs 39,000 per annum on end-users.

Similarly on Rs 20 lakh housing loan, approximate change in EMIs at the interest rates varying between 7% to 12% works out to be Rs 6,520 and puts its taker an additional burden of Rs 78,240 per annum.

Furthermore, a housing loan of Rs. 30 lakh, EMI differential works out to be Rs9770 with additional fiscal burden of Rs 1,17,240 per annum.