Will RBI's Generous Rate Cut Revive The Real Estate Industry?

As opposed to the market’s expectation of a 25 basis points cut, the RBI has delivered an astounding 50 basis points reduction. With this, it has clearly abandoned its cautious baby-steps approach and assumed a bolder stance, obviously because the current economic fundamentals provide it with the room to do so. Given the magnitude of this step, I do not think any further rate cuts are likely in this financial year, especially since the RBI foresees a moderate growth in inflation rate in the interim months. 

For the affordable housing sector, the outlook is nevertheless bright, since the RBI governor has made provisions for lending to this sector to become less stringent and broader in scope. 

Of course, real estate industry stakeholders - particularly end-users and investors in residential property - is still left with questions about how well RBI's latest move will work in reviving the industry. It has been noted that selling prices must come down before any significant revival can take place, and that reduced interest rates alone are not sufficient. 

In the first, place it is incorrect to say that prices have not corrected. A majority of new housing project launches have been at lower rates than those of earlier projects launched in the same category projects and in the same locations. Also, while developers in the residential sector are definitely feeling the pinch owing to high inventory levels and restricted upward momentum in prices, they are careful not to continue with a slew of new project launches in the premium and luxury segment. 

Rather, over the last few quarters, the focus has been on launching projects that fall in the mid-segment category. In the case of tier-I cities, this would include apartments priced under Rs. 1 crore. 

Firstly, there is ample demand for mid-segment homes within the city limits of major metros in India. Secondly, executing projects in the affordable category requires good technical expertise and a high level of professionalism, and therefore may not be a forte for a large set of developers. 

As a consequence, over the next few years, average prices across major cities would witness a fall to levels that are more sustainable. It is important that both the RBI and government take necessary prerogatives to boost developments in the affordable category. Policies such as Housing for All and the recent RBI directives will go a long way in helping the cause.