Thursday, May 31, 2018

What shall I do if interest rates go up?

Author: Sachin Gupta | Find me on Twitter

Sumit booked his apartment in a builder project in 2010 in Noida Extension. He booked a 4BHK unit measuring 2250 Square Feet at a base selling price point of Rs. 1950 per Square Feet. Prices were affordable and he was able to book the apartment within his budget:

Area of the Apartment (SqFt) 2250
Base Selling Price (Rs/SqFt) 1950
Development Charges (Rs/SqFt) 225
Car Parking (Rs) 150000
Club Charges (Rs) 100000
Interest free Maintenance Charges (IFMS) in (Rs/SqFt) 85
Final cost of the apartment (Rs) 5335000

Out of the required 53.35 Lacs, he arranged for 13.35 Lacs from his own sources such as cash, provident fund, and fixed deposits. Balance amount of Rs. 40 Lacs was availed from a leading bank in form of home loan. Home loan rates in 2010 were hovering at around 8 to 8.25%. Which meant his monthly payment in form of EMI was Rs 33458 for a period of 20 years. His home loan interest rates were of floating type. This meant whenever, RBI revises repo rates, home loan interest rates would go up or down depending upon RBI monetary policy.

Everything was going as per plan; however, as the inflation started to go up because of various macro economic factors, RBI started revising its monetary policy. The focus of RBI moved towards bringing inflation under control. And therefore, interest rates started moving up. From about 8% in 2010, the interest rates jumped to about 11% in 2014.

What it meant for Sumit was that his EMI outlays increased over a period of time. At one point of time, he was paying monthly payment of Rs 41288 in form of EMI. That’s an increase of Rs 7830 per month.

What can Sumit do to maintain his EMI under control?

  1. Stretch the loan tenure: Sumit had availed home loan for a period of 20 years. However, since, interest rates had moved up, he could sit with bank officials and seek to extend the loan tenure to 25-30 years. Thereby, he can bring his EMI under control.
  2. Move to another lender: Sumit can also move to another lender offering lower interest rates. In this case, he has to study and analyze the offers by various banks. And if there is a difference of about 0.5%, then, Sumit can switch to another lender to bring his EMI under control. However, he should check if there are any pre-payment charges with existing lender. As per RBI rule, customer can move from one lender to another without paying any pre-payment charges.
  3. Prepay portion of the Loan amount: Sumit can also prepay some portion of his loan amount to the existing lender. This way, his EMI would come within manageable limits.
  4. Avoid shifting to fixed loan rates: When interest rates are fluctuating, many people believe fixed rates are way to go about. However, fixed interest rates are more expensive and at the same time, one cannot take benefits of lower interest rates as and when RBI brings interest rates down. Therefore, Sumit should stick to points 1, 2, or 3 and should completely avoid point 4.

Thanks. Please share!

Have any Questions?

Thursday, May 24, 2018

Mechanism for sudden price appreciation and need for regulator

Author: Sachin Gupta | Find me on Twitter
To many this wouldn’t be a new thing, I am talking about the sudden increase in residential property prices in Indian metro cities between the periods 2003 to 2007. On a macroeconomic side, it is very well documented that prior to 2003, the property prices were significantly depressed and they shot up post 2003 on account of huge demand driven by increased jobs in sunshine sectors such as IT, Auto, and services. This coupled with relatively short supply gave further rise to real estate prices.

But how did prices go up so suddenly to the tune of almost 8 - 10 times. Well, I struggled a bit to understand that phenomenon and after years of being in real estate sector, here are my two cents.

Firstly, on account of increase in jobs as well as increase in income levels, the demand for housing was tangible. However, the supply was limited and new infrastructure has to be created to cater to that rising demand. That new infrastructure (if we talk about Delhi NCR) could only be developed in new locations such as Greater Noida, New Gurgaon, Golf course extension road, Greater Faridabad, Far away Ghaziabad, and so on.

Now, simple calculations will tell us that cost of construction is about rupees 1200 per square feet (I am talking about high quality construction at current prices). Add land prices to that number, and you would arrive at rupees 1300-1400 per square feet of developed land in the new locations mentioned above. So, how could builders of these new developments in those locations sell those properties for about Rs. 2500 – 3000 when you have properties being sold in primary (already developed) locations such as Faridabad, Noida, Gurgaon, Ghaziabad being sold for Rs. 1800 – 2000 per square feet. No guessing here, the prices have to move northwards in primary locations to justify the Rs. 2500 – 3000 in new locations.

But how do prices move northwards in primary locations? Well, tried hard and after spending some years in real estate sector came to realize that it needed vitamins, injections, or even better steroids. To illustrate it very simply, take a case of real estate sector in Noida where land rates in 2003 were hovering at around Rs. 800 – 1000 per square feet in most localities. All of a sudden builders ABC, XYZ, and few more enter the market and purchased the land plots for Rs. 3000 – 4000 per square feet and I am talking about the primary Noida locations here. What it meant for those builders was loss of money (maybe 50-100 crores) having bought the land at high prices when same was available at very low prices. What does it mean to Mr. Sharma, who believed that since Mr. Verma has sold his plot at Rs. 4000 per square feet, that he wouldn’t sell it for anything less than the Rs. 4000. And rest as they say, residential land price of Rs. 4000 per square feet became the market price in no time.

Now, the very same builders were developing the new locations and now that the price in primary location has already been put on steroid, they can charge Rs. 2500 – 3000 in new locations. So, for the loss of Rs. 50-100 crores, they can now easily make thousands of crores. No fault of theirs, in a capitalist world maximizing value is the key and they did it in open market. However, presence of real estate regulator could have avoided this steroid and maybe saved the common man with pains of going to new locations when most jobs are in primary locations. Given the income levels in major metros, can you justify the prices of real estate? No, and that’s where the real estate regulator could have been helpful.

Have any Questions?

Saturday, May 19, 2018

UK’s Generation Rent

Presenting below the info-graphic on UK’s Generation Rent!

Young adults between the ages of 18 – 35 who are living in rented accommodation in UK are known as UK’s Generation Rent. 

This segment of population has little chance of becoming homeowners because of high property prices in UK. Is it true? Let’s compare UK’s Generation Rent with other nations in the EU.

Saturday, May 12, 2018

Mistakes to avoid when you rent out your apartment

A real estate report that was released recently highlighted the facts why Bangalore is considered as the most preferred city to stay in the country and also to invest in properties. While the real estate and property markets are down in cities such as Mumbai and Delhi, the report suggested that Bangalore has now a high rate of residential properties and the rate of rented apartments is going up with every quarter. Bangalore has a typical mobile population wherein people, young adults to be precise, come to the city to study and work on a temporary basis. This has resulted in the increasing numbers of rental accommodations like houses, flats and paying guests in Bangalore.

There are certain dos and don’ts that tenants need to keep in mind while finding a rent house in Bangalore so that the deal is profitable and stay is comfortable. However, as an owner also, one must keep in mind certain factors to avoid making mistakes., India’s first broker free housing portal lists down the common mistakes that one can avoid as an owner of rented properties.

The first basic mistake that a landlord might make is deciding on a proper rental amount to charge. Apart from the basic rental charge, there are many additional charges that as a landlord, one might need to pay. These may include maintenance bills, water bills, etc. If the tenant has to pay these separately, you may keep them out of the rental charges. Else, make a list of the utility items that you need to pay and make it part of the entire rental charges for the tenant.

Make sure to conduct a background check on your possible tenants before you allow them to stay in your house. It eliminates the possible chances of inviting uncalled troubles if the tenant turns out to be someone charged with legal cases or similar other situations. It also helps you stay clear of the legal issues as a landlord. You can call up their workplace or any reference number to get a background check about the person or the family and then decide accordingly. If required, do not hesitate to check on your tenant after renting out the house also. Regular screening of the property and the house and a proper credit check of the tenant is important.

One basic rule of being a landlord is to be familiarized with the various legalities involving the laws of real estate sector and what it means when renting a house. Get yourself familiarized with the various aspects of the laws regarding renting out apartments to the tenants. You can consult a legal adviser specialized in this sector. Be sure about the policies involving security deposits, maintenance costs, and payment of rent on a mutually agreed upon day, parking and other community charges if any.

While preparing the lease document, make sure to include all the clauses pertaining to maintenance of the house, items provided by the owner, payment of rent on a particular day of the month, extra payment for the utility items, etc. Get the lease documents verified by your legal adviser, read it carefully and share it with your tenant. If your tenant suggests changes, get it verified by the adviser, come to a mutual agreements and then sign the paper, after you have read it carefully (again!).

Before renting out the apartment, make sure to have discussion regarding the revision and raising of rent amount annually. Discuss the percentage of raise and other associated charges properly to avoid ambiguity at a later stage.

Lastly, maintain a cordial relationship with your tenant. It will help in having the same tenant year after year and will develop the trust. Ensure that you are there to help them if they need you and offer to fix any damage in the house immediately that has not been caused by them.

This is a guest post by Shanaya Mehta