Real estate sector faces slowdown

6 April, 2008

The real estate sector in India is going through tough times with higher interest rate and economic slow down affecting consumer spending.

Realty deals in major cities such as Delhi, Mumbai, Bangalore, Chennai and Hyderabad have come down sharply in October 2007 - March 2008. While there is huge potential for two-digit growth in the sector, retail customers are still wary of buying a home at the present prices and high interest rates. Banks, property builders, land banks and other real estate players are feeling the heat of low demand in this sector.

Worse, the recent downsizing in the IT sector has added to the fears of property builders. There have been reports that many companies have given pink slips to its employees due to the rising slowdown fears in the United States.

The most credible reasons for the real estate boom in India were the increase in the young working population, easy availability of home loans, hefty pay packages, and double-income nuclear families in urban areas. The emerging opportunities in the services sector had simultaneously provoked banks to offer cheap loans.

But as the economy reported near two digit growth, interest rates also moved up substantially in 2006-2008. A series of interest rates hikes in 2007 put the brakes on home sales. Middle-class households put off purchases after prices went through the roof in most major metros.

New home loan disbursals are also coming down. Considering the drop in demand, property developers are not able to cut prices as raw material prices have shot up in the last two years. The prices of steel, cement and sand are now at a record high due to global reasons.

RBI may increase cash reserve ratio of banks to combat spiraling inflation in the country.




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