With the softening of global crude oil prices and domestic inflation, along with the rural wage growth hitting a 10-year low, the indications are pretty clear that the economy may soon move towards a lower interest rate regime. Such a move is known to have positive impact on the home buyers sentiments and this may lead to a pick up in demand and residential real estate prices.

While there are expectations that the interest rates may be cut by around 100 basis points in the calendar 2015, it only augurs well for revival of the real estate market and pick up in demand in which case it may be wise for prospective home buyers to go in for their purchase before the prices start to move north.

Rate cut and Residex movement

The movement in the Residex (the housing price index prepared by the National Housing Bank) makes it clear of the impact of the interest rate cut by the Reserve Bank of India on property prices.

While the residential real estate demand and housing prices remained weak in 2014 when the interest rates were ruling high, in the period between April 2012 and May 2013 when the Reserve Bank of India cut the Repo rate — at which it lends to commercial banks — by 125 basis points from 8.5 per cent to 7.25 per cent, almost all real estate markets across the country witnessed a rise in prices.

Following a decline in the interest rates, the Residex value between June 2012 and December 2013 rose significantly. The Residex value in Jaipur rose by almost 35 per cent and that in Pune, Delhi and Mumbai rose by over 10 per cent representing an equivalent average hike in housing prices.

A closer look at the micro-markets in Delhi NCR and Mumbai shows a sharp rise in prices in developing areas where new supply came up and which are relatively affordable.

While the prices in Delhi NCR rose by an average of 14 per cent between June 2012 and December 2013, the prices in Zone D (including Noida, Gurgaon, Mayur Vihar, Dwarka and Ghaziabad) went up by 32.5 per cent. The biggest increase was in areas including Govind Puri, Dilshad Garden, Sangam Vihar, Srinivas Puri where the prices rose between 41 and 71 per cent.

Even in Mumbai, while the average price rise in the period was 12.7 per cent, the Zone 4 that includes Kurla and Chembur saw an average price rise of 33.8 per cent and Zone 5 that includes areas such as Malad, Borivali and Goregaon witnessed a price rise of 30.6 per cent during the period.

Thus, there is a clear correlation between interest rate cuts and demand and price rise. The data of the repo rate cut and Residex movement shows the influx of new home buyers in areas where the prices were relatively low and the new developments were coming up as the interest rates went down.

Expectation of rate cut

While the government has already taken several steps to provide a fillip to the real estate industry such as removing the lock-in period for exit of FDI in construction, reduction in the minimum floor area to 20,000 sq mt , the industry players are now hoping for a rate cut to bring in demand.

Amidst softening inflation, the calls for rate cut grew loud ahead of the December monetary policy review of the RBI.

Raghuram G Rajan, Governor, RBI also hinted at a rate cut early in 2015. “If the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” said Rajan, in the policy statement on December 2, 2014.

Now, since the inflation numbers and crude oil prices have remained subdued and even the rural wage growth has hit a 10-year low, experts feel that RBI may finally go in for a rate cut in its forthcoming monetary policy review meeting in February.

Keki Mistry, vice chairman and CEO of HDFC Ltd had earlier said that there may be an interest rate cut of 100 basis points in the calendar 2015. So if the rate cut begins, which all relevant indicators are pointing towards then it may lead to a rise in housing demand and even in prices.

While 2014 did not see much activity on new project launches and inventories piled up with demand not kicking-off, industry experts are expecting better absorption of existing inventory in 2015 along with new project launches.

“The factors most likely to impact the real estate market positively are stronger and sustained GDP growth; more relevant reforms, such as the recent amendments made to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013; and the paring of interest rates,” said Anshuman Magazine, CMD, CB Richard Ellis South Asia.