Monday, October 6, 2008

Festive season: The right time to buy a house

House shopping:

The festive season, which starts with Navaratra, is considered to be an auspicious time to purchase a house.

Developers and builders are hoping this sentiment will transform the current gloomy environment in the real estate sector in the country. There is a general expectation that end users will start buying houses, as developers are giving discounts and other freebies to promote their sales.

Developers are offering special schemes like payment of 15% to 20% of the total cost at the time of bookings of the property and the rest at the time of giving possessions

Freebies:

Car-parking and club membership are also being offered free to create a tempo in the sales. Some developers have even agreed to pay EMI till the possession is given. On top of this, developers have also announced special gift items to lure buyers. A few other developers have announced special schemes for government employees , who are flush with funds now that arrears of their salary hike as per the sixth pay commission have been cleared.

Such schemes are good and if you are planning to buy a house, give a close look to each of these and find out whether the deal is good enough or not. The positive aspect of such schemes is that they defer the payment liability on major portion for at least two years.

So, suppose, if you expect your income to rise by 10% per annum , after two years, your earnings will go up by around 20%. This will help you plan and buy a bigger house. Your EMI as a proportion of your total income after two years will be lower than that of your current salary.

Interest rate:

The other positive aspect is that you will save a substantial amount on your interest outgo. At present, the interest rate on home loan is quoting at 11% to 12%. In the present global circumstances, the chances of interest rates falling in the next one year are not very high. However, bankers feel that the global financial crisis will not affect the Indian financial system much.

Besides, the Reserve bank of India (RBI) has enough financial strength that it can make loans available at competitive rates.

Therefore, bankers feel that the interest rates will start softening in the next one year. Meaning, if you accept the schemes of the developers of paying 80% to 85% of the cost after two year, you can save yourself from borrowing the major amount at the present high interest rates. You will be required to borrow the major amount after two years, when the rates are likely to fall.

Cost-benefit analysis:

But, before accepting a scheme, you must do the cost-benefit analysis . Normally, when you go for deferred payment system, the developer charges you higher price than the price at which he sells under the cash-down scheme.

If the difference in the price is around 15% to 20% i.e., if the prices under deferred scheme are 15% to 20% higher than those under the cashdown scheme, you can accept the scheme provided that the upfront payment is limited to 15% to 20% of the total cost and the rest of the amount is to be paid after two years.

At the same time, you must connect the payment of the remaining amount with the delivery of the completed house. In this manner, you can force the developer to deliver the house on time. You can also force him to fulfill all the promises that he gave you at the time of selling the property.

Slowdown:

The real estate sector is facing one of the worst slowdowns in recent times. As the inflation continues to hover above 12%, the central bank is not likely to infuse liquidity in the system in the near future to bring down the interest rate. The present high interest rates have affected the affordability of common buyers.

Now, as the conditions in the global market have also been affected by the crisis in US and European financial sector, the interest rate is likely to remain firm. This will affect the demand from non-resident Indians. According to a report by Jones Lang LaSalle, NRI investors buy 15% to 25% of all new developments.

It says that the location of NRIs is quite diverse with significant numbers residing in the UK, the US, Singapore, Malaysia and the Middle East

The time is now:

But, the condition in the last one month has changed dramatically. Because of the tight liquidity condition, developers are also finding it difficult to launch new products.

This is going to create a huge demand-supply gap in times to come. Therefore, when the condition improves and the interest rate falls, the property prices are likely to rise substantially. Therefore, for the end users, the present festive season is a good time to go for their dream house.

But, a proper research to choose among the various products and schemes that developers are offering this festive season is sin qua non, before any purchase of that sweet home. By- Prabhakar Sinha, ET Bureau - The Economic Times

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