Post rate cut, is it wise to invest in Luxury homes or Budget Homes?

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The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The market is expected to touch US$ 180 billion by 2020 with housing sector alone contributing 5-6 per cent. Still, availability of housing has always plagued buyers due to exorbitant land rates paired up with steep construction rates.  In what can be considered, as one of the biggest rate cuts of current economy, banks have started reducing their lending rates. Punjab National Bank, the Union Bank of India and the State Bank of India (SBI) has already announced a cut in their benchmark lending rates. Consequently, SBI has reduced its home loan rates by 50 basis points (bps) for loans up to Rs 75 lakh.  The bank now offers home loans at 8.65 per cent instead of 9.15 per cent for all borrowers except women who have an additional relief of 5 bps. New borrowers will account to an increase in their eligibility with the 50 basis point drop in interest rates for a home loan. A borrower earning Rs 1 lakh was eligible for a home loan of Rs 55 lakh for 20 years if the lender capped an EMI of 50 per cent on the monthly income. Despite the early announcement of rate cut, it may take a while for the borrowers to reap the benefits. Increased loan eligibility, less EMI and competitive bank loan options are three main benefits which would facilitate a boost in the volume of sales, with this rate cut. Yet, most home buyers are clueless in dealing with the current rate scenario. Most home buyers are not economists and would go only as far as to calculate the total cost of a home, hasten the process of availing a loan and seal the deal, without prior ground check. In this era of burgeoning prices and rapid pay cuts, smart buying practices contribute to a bigger picture in salvaging inflation. Lending rates have a huge impact on the home loans one can avail. For a home buyer, a lower lending rate implies that his bank can have access to money at a cheaper interest rate. This can affect the type of homes one wants to purchase, be it luxury or budgeted. Here are some factors to be noted while buying homes of each segment- Luxury Homes:

• Metro cities always have the advantage for luxury Homes buyers due to amenities, security, comforts, better communities and social standard that it has to offer. Hence greater demands for well-located estates.
• With the projected growth in the economy in the coming decade and increase in HNI segment, luxury segment looks very lucrative. Growth of economy directly affects the purchase power of every individual of a macro level, hence increasing the demand for such aspirational purchases.
• Since the options in this segment are less and there is an increased demand there is likely to be good price appreciation for second home buyers also. Second-hand homes are of great demand amongst a population that is low in finance but high in aspirational buying. Hence, second-hand luxury homes are an apt purchase to those in need of bespoke homes in an affordable price range.
• Usually luxury homes are provided with good infrastructure, in prime locations with world class amenities which makes it a good investment option. Indians strongly believe in the power of investments, stressing on purchase of commodities that have salient market values for upcoming years.

Budget Homes/affordable homes:

• Unlike luxury homes where the buyer has to compromise on space, in this segment with rate cut they can opt for more sq ft at the same price. This acts as a profitable proposition for those looking for a more affordable yet spacious option to live in.
• Price appreciation is anticipated in this segment with the growing demand for affordable housing. This would influence budgeted homes, with middle-class and young individuals opting to initially purchase budgeted abodes and save for future property-based decision.
• In the year 2016 there were many bills, incentives proposed and passed by the government for affordable housing sector. 2017 is forecasted to have a bright influence on the real estate font, with affordable homes mushrooming at an elevated rate. This would facilitate a surge in housing sector to a noteworthy level.
• Room for better negotiation and price as there is immense supply of units in the affordable housing sector. With the lending cuts leaving an impact on the home loans availed, a larger margin for price negotiation is implemented, with increasing opportunities to purchase an affordable house at nominal rates.
• Affordable housing within the city limits should always be preferred to yield proper returns on investment. Not only does it provide the facilities of being well connected and security, the rate of investment gets nominized with focus on purchase that retains value in the longer run.

To facilitate progress, banks are bringing down their Base Lending Rate (BLR). Only once the Base Lending Rate has been reduced, the EMI (equal monthly installment) loans are going down. The government facilitated an Under the Credit Linked Interest Subsidy component with interest subsidy of 6.5 percent on housing loans availed upto tenure of 15 years will be provided to EWS/LIG categories, wherein the subsidy pay-out on NPV basis would be about Rs.2.3 lakh per house for both the categories. Central assistance at the rate of Rs.1.5 lakh per house for EWS category will be provided under the Affordable Housing in Partnership and Beneficiary-led individual house construction or enhancement, is also being undertaken. Certain mandatory reforms for easing up the urban land market for housing are also being implemented to make adequate urban land available for affordable housing. These reforms, paired up with the rate cut, are doing their bit to make housing affordable for all sections of the society.

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