The real estate industry received 2 big-bang stimulus this New Year.
Flush with low cost deposits, banks like SBI, Union Bank of India, PNB
and IDBI have reduced home-loan lending rates by as much as 90 basis
points. Two, PM Modi, on 31st December, announced the decision to provide interest subvention of 3% and 4% for loans of up to Rs 12 lakh and Rs 9 lakh respectively under Prime Minister Awas Yojana (PMAY).
Here’s a simulated impact that each of these stimuli would deliver to a home-buyer:
Lets take a deeper-dive and evaluate areas where these measures would have a more profound impact.
1. Localities with high-rental yields
Our Buy vs Rent Calculator suggests that when spread between Rental Yield and EMI reduces to ~2.0%, the choice between Buying vs Renting increasingly favours Buying instead of Renting. Of course, there are multiple variables that influence a ‘buy vs rent’ decision, but a high rental yield and a low-interest rate environment are two important variables here. There are several localities where Rental Yields are in excess of 4%. With home loan interest rates softening, localities with high rental yields are likely to see more buying interest as buyers would seek to purchase rather than rent out a property. To add more context, the years 2006-08, when interest rates were as low as 7.75% also saw buying activity peak. A sample list of localities with high-rental yields are given below.
2. Upcoming localities with a high spread of affordable homes
The PMAY scheme, with an effective interest rate of ~5%, makes for a very compelling case to buy a home vs renting one. For Urban areas, the challenge in this segment is that localities which offer homes in this budget are often located outside city limits with limited transport connectivity. However, some state governments have taken initiative to make such homes available within municipal areas as well. Expect more activity in such pockets which have homes where the PMAY benefit could be availed.
3. Localities which are at the intersection of falling prices and higher rental yields
My earlier post had pointed to a fall in properties prices at a pan-India level, post demonetisation, by 4%. Now this fall in prices, taken together with an EMI saving of ~6%, has led to a ready-made bouquet of anything between 8-12% effective discounts for home buyers over prevailing prices. Now combine this with localities which enjoy a rental yield >4% as shown in the table above. Even an unsophisticated buyer would begin to see an improved investment logic for buying in such localities; expect far more activity levels in these localities.
Here’s a simulated impact that each of these stimuli would deliver to a home-buyer:
- The reduction in home loan lending rates translates into a ~6% reduction in the EMI of a home-seeker. Bear in mind that interest rates have steadily fallen over the last several quarters, and are expected to fall further as we go along.
- The PMAY scheme offers home loans at an effective interest rate of ~5%. Assuming a 80% loan component, buyers purchasing a Rs 9 lakh worth home would face an EMI of just Rs 4,752 per month and those buying a 12 lakh home would face an EMI of Rs 6,336. Effectively, for a lot of such home-seekers, the EMI would probably be lower to their current rental outflow and therefore make for a compelling reason to buy vs renting a home.
Lets take a deeper-dive and evaluate areas where these measures would have a more profound impact.
1. Localities with high-rental yields
Our Buy vs Rent Calculator suggests that when spread between Rental Yield and EMI reduces to ~2.0%, the choice between Buying vs Renting increasingly favours Buying instead of Renting. Of course, there are multiple variables that influence a ‘buy vs rent’ decision, but a high rental yield and a low-interest rate environment are two important variables here. There are several localities where Rental Yields are in excess of 4%. With home loan interest rates softening, localities with high rental yields are likely to see more buying interest as buyers would seek to purchase rather than rent out a property. To add more context, the years 2006-08, when interest rates were as low as 7.75% also saw buying activity peak. A sample list of localities with high-rental yields are given below.
2. Upcoming localities with a high spread of affordable homes
The PMAY scheme, with an effective interest rate of ~5%, makes for a very compelling case to buy a home vs renting one. For Urban areas, the challenge in this segment is that localities which offer homes in this budget are often located outside city limits with limited transport connectivity. However, some state governments have taken initiative to make such homes available within municipal areas as well. Expect more activity in such pockets which have homes where the PMAY benefit could be availed.
3. Localities which are at the intersection of falling prices and higher rental yields
My earlier post had pointed to a fall in properties prices at a pan-India level, post demonetisation, by 4%. Now this fall in prices, taken together with an EMI saving of ~6%, has led to a ready-made bouquet of anything between 8-12% effective discounts for home buyers over prevailing prices. Now combine this with localities which enjoy a rental yield >4% as shown in the table above. Even an unsophisticated buyer would begin to see an improved investment logic for buying in such localities; expect far more activity levels in these localities.
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