The pandemic has changed people's perception of home ownership significantly. Those who already own a house are looking to buy a bigger one, with work from home (WFH) set to become the new norm. But, with the second wave of Covid-19 hitting the country hard, is it the right time to invest in a new house? Also, should you go for a property under-construction or look for a ready to move in one? Or, should you invest in real estate only for returns? A lowdown.
Back In Demand
With phased opening up, pent-up demand, the festive season of the previous quarter and the on-going vaccination drive, economic recovery is gaining momentum. It has pushed the real estate adoption significantly higher as well.
According to experts, demand went back to almost pre-Covid levels during January-March 2021. In fact, February and March were the best ever in terms of traffic in the history of online real estate portals such as Housing.com and PropTiger.com. But, with the onset of the second wave of the pandemic in April, property searches witnessed a slowdown. Experts, however, see it as a brief setback.
"We have seen an incredible growth in traffic, from 10.5-11 million per month to more than 25 million visits during March 2020-March 2021," says Dhruv Agarwala CEO, Elara Group, which owns Housing.com, PropTiger.com and Makaan.com.
"As far as housing sales are concerned, we are seeing a temporary slowdown due to the rampant spread of Covid-19," says Anuj Puri, Chairman, ANAROCK Property Consultants. "The market will quickly regain an even keel once the vaccination drive picks up pace and the health infrastructure crunch abates."
In the last few months, online house search portals have seen a lot of growth in traffic for buying properties. People now want bigger homes. "Previously, the best-selling used to be 1BHK or 2BHK. Now, 2BHK+study or 3BHK are more in demand," says Agarwala of Elara Group.
Though bigger homes are in demand, there is hardly any speculative buying. "People are not very confident about the future. Speculative transactions, where they used to buy four flats anticipating a 40-50 per cent price hike to enjoy huge returns in a few years, have stopped," says Raj Khosla, Founder and Managing Director, MyMoneyMantra.com. "The days when properties doubled in value in a few years are gone," he adds.
Another big shift is the emergence of Tier-II and Tier-III cities as demand drivers. Many employees have moved back to their hometowns in these cities amid Covid, resulting in a surge in demand for property. "Earlier the demand mix was 80:20, where 80 per cent came from Tier-I cities. Now the ratio is changing," says Agarwala. "We are going to go in a big way to Tier-II cities as well. It is an irreversible trend."
Affordability At Its Best
According to a report by IMGC, the Home Affordability Index is at its best ever in eight major metros. It is likely to improve later in the year. IMGC is a joint venture between International Finance Corporation, Asian Development Bank, Genworth USA and National Housing Bank.
Real estate experts believe now is the time to shop for your desired property. "A host of factors such as historic low home loan rates, stamp duty cuts in few states such as Maharashtra and Karnataka, developers' schemes to attract customers are a few favourable reasons," says Agarwala of Elara Group.
Prices are within reach as well. According to the IMGC report, property prices across most markets have corrected 5-20 per cent in the last few months, especially in Tier-1 cities.
Real estate consultants Knight Frank's 'Prime Global Cities Index Q1 2021' shows Bengaluru has moved down four places in the latest index at 40th rank in the first quarter of 2021. "Against 36th rank in Q4 2020, Bengaluru saw a 2.7 per cent year-on-year decline in prime residential prices," according to the report. New Delhi and Mumbai have also moved down one spot each to 32nd and 36th, respectively, during January-March 2021, against 31st and 35th rank in October-December 2020.
The Prime Global Cities Index is a valuation-based index that tracks the movement in prime residential prices in local currency across 45-plus cities worldwide.
Low Interest Rates
Banks have lowered home loan rates since the last quarter of 2020, passing on the benefits to customers, and boosting the demand for housing loans. Home loan rates are at currently at a 15-year low. Kotak Mahindra Bank, State Bank of India, HDFC, ICICI Bank, Axis Bank and LIC Housing Finance, among others, slashed their home loan rates in 2020, and reduced them further in 2021. They are currently in the range of 6.65 -6.90 per cent per annum. Some banks were offering these record low rates as a limited-time offer.
Public sector banks, including State Bank of India, Bank of Baroda and Canara Bank, are offering even lower rates, in the range of 6.70 -6.90 per cent.
However, any further cuts are unlikely unless there is a reduction in the repo rate or other external benchmark rates, which is highly uncertain. All retail loans are linked to the external benchmark - repo-linked rate. When a bank reduces its external benchmark rate, customers availing home, mortgage, car, education, personal or other retail loan products can avail the benefit.
Fixed Or Floating?
But, should you go for a fixed or floating rate? If you are considering 15-20 year home loans, a fixed home loan might work better, says Khosla of MyMoneyMantra.com. "Now is really the best of times. A fixed-rate home loan will be a little pricey than a floating one, but since the rates are currently so low, it will benefit over a long period of time."
How much do home loan interest rates matter? For people who are paying EMIs, even a small amount of Rs 1,000 a month makes a difference, says Agarwala of Elara Group. If they can save it for two-three years, there's no harm, he adds.
Even if you wish to opt for a floating rate home loan, some extra saving on your EMI for a few years (assuming interest rates will remain at similar low levels for sometime) will be beneficial as well.
But Caution Is Key
While existing record-low rates might lure people to make their property purchases, experts warn them of reversal in interest rates. So, borrowers need to budget accordingly. Home loans typically have longer tenure, and borrowers witness several reversals of interest rate regimes during the entire loan tenure. "As home loans are mostly lent based on floating interest rate, a rising interest rate will inevitably impact all floating rate home loans, at best with a short-time lag," says Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.
So, does it make sense for borrowers who are currently paying higher interest rates to switch their existing loans to banks offering lower rates?
Existing home loan borrowers should not try to time their loan transfer with the changes in the interest rate regime, says Chaudhary. "But if a home loan borrower becomes eligible for a new loan at a lower interest rate due to improvements in his/her credit score, income profile, employment profile or other aspects, he/she should consider transferring the home loan to other lenders at lower interest rate."
A steep drop in interest rates offers a good opportunity for borrowers to earn substantial savings on their interest outgo by opting for a lower-priced loan via balance transfer, says Ambuj Chandna, President, Consumer Assets, Kotak Mahindra Bank. "It is especially useful for those who still have a longer tenure before repayment. Lower interest rates would help existing customers in trimming their EMI outgo."
A back-of-the-envelope calculation shows that a customer whose loan amount is Rs 30 lakh (at 8 per cent interest per annum for 20 years) can save Rs 2,460 per month on his EMI payment by switching to the current lowest interest rate at 6.65 per cent per annum. On a Rs 30-lakh loan, the existing EMI would be reduced from Rs 25,093 to Rs 22,633, resulting in a savings of around Rs 5.90 lakh in 20 years. (See chart: Home Loan Balance Transfer)
However, balance transfer is not free. One needs to factor in various costs while transferring the loan, including prepayment penalties, if any, on the existing loan, processing fee charged by the new lender, etc. "Opt for the loan transfer only if the savings made in interest cost through loan transfer exceed the cost by a wide margin," advises Chaudhary of Paisabazaar.com. Processing fees for transfer of home loans vary from Rs 10,000-15,000.
What To Buy?
The pandemic is not over yet, and the resurgence of cases continues to impact the economy. So, one has to be careful regarding the nature of property. Go for self occupancy, do not invest in a property to rent it out, advise experts.
Khosla of MyMoneyMantra.com explains that if you want to buy a shop in Khan Market, which you want to occupy yourself and start some business, surely go for it. But if you are planning to take a loan to purchase the property and give it on rent, now is not the time. In a Covid-hit market, the rent may fall or the shop may lie vacant for a while, but the needle is ticking in case of interests and EMIs. "I would not recommend buying a commercial property to give it out on rent in the current market," he says.
He cautions homebuyers to stick to a good brand name if they are looking for an under-construction property. In case of a ready-to-move-in one, the developer brand does not matter much, as much as the location.
According to existing rules, if you are a first-time buyer, you can avail income tax benefits on home loan under three sections - Section 80C, Section 24 and Section 80EEA of the I-T Act. These sections allow one to avail a maximum benefit of up to Rs 5 lakh annually.
Section 80C allows a maximum tax deduction of up to Rs 1.50 lakh on home loan principal and stamp duty. However, to avail the benefit, the homebuyer wont be able to sell the property within five years of possession.
Section 24 allows a homebuyer to avail a maximum tax benefit of Rs 2 lakh on the interest, provided a family member of the assessee is living in that house. The entire interest is waived off as a deduction when the house is on rent. Section 80EEA, on the other hand, allows a maximum deduction up to Rs 1.50 lakh provided the stamp duty value of residential property is up to Rs 45 lakh. Apart from this, the home loan should be approved by a financial institution between April 1, 2019 and March 31, 2022, and the assessee should not own any residential property till the sanction of the loan. Also, he should not be claiming any deduction under Section 80EE.
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