Property market may slow down in 2011: Gruh Fin MD

DESPITE prices having peaked, the realty market has been sustaining itself, thanks to the fear psychosis among home buyers that prices will shoot up further, making it more difficult to own a property. In an interview with ET's Avinash Nair& Vishal Dutta, Gruh Finance MD Sudhin Choksey says the first quarter of calendar 2011 will decide whether the much-awaited fall in property prices will take place or not in 2011-12. Excerpts:

Realty prices have peaked, the Reserve Bank of India (RBI) has been increasing key rates and banks' lending rates are also on the rise. How will this impact home buyers and the housing finance industry?
Home loans are, of course, becoming expensive. However, the high interest rate is not too much of a negative factor. During the high inflation period between 1993 and 1995, we gave loans at a rate as high as 15%. Even then, people bought properties. However, the most important factor impacting the housing finance industry is the rising property prices, because even at interest rate of 7-8%, homebuyers are not in a position to make a buy.
    My concern is more about the speed with which the prices have gone up. It has adversely impacted the buying power of the middle-class. Today you go around Ahmedabad and you will find it difficult to buy any new property at less than 30 lakh. Realty prices have been rising without any correction. I think, for any market to sustain itself, the movement of prices has to be both ways. If it goes up, then it also needs to get corrected. Unfortunately, I think we are not witnessing a correction in prices in the real estate market at present. Moreover, in the past few years, while family incomes have doubled, the property prices have quadrupled.
With property prices already beyond the reach of a commoner, what are the reasons for the sustained demand for houses?
Most of the demand that we currently see is due to a fear psychosis that property prices will rise further, taking homes further out of reach. However, there is a certain limit to people's buying capacity. This scenario cannot continue for long as property prices have already peaked. Rising interest rates, inflation and property prices will slow down the demand for houses.
Have you started getting any feelers that the property market is slowing down? When will a correction happen?
For the country's property markets, Mumbai is the trigger. If investors do not see investment opportunity, they will start moving out and Mumbai will begin to slow down. This effect then starts percolating to nearby areas like Surat, Pune, Ahmedabad and Vadodara. I was in Mumbai recently and I learnt that Mumbai markets were actually slowing down. The developers are currently holding on to the prices, because they have made good money in the past 2-3 years. But we all know that they cannot hold on to the price for long as it may affect their turnover. If the recent real-estate transactions are taken into consideration, we might see a slowdown in 2011.
Do you think houses are getting smaller in the wake of rising land prices?
If you see a shampoo sachet or any other FMCG product, the marketers have cut down volume to make them affordable. The way the cost of land has gone up, the only way to make a house affordable is by keeping it small. The main reason behind rising prices is land hoarding. The construction cost is not much. A person with 10,000 salary will get at the most a loan of 4.5 lakh to buy a property. Is there any property in that budget? If his budget is 6
    lakh, he has to compromise on the
    size. But there is also a limit to which you can squeeze.
If the property market slows, what effect will it have on real estate in smaller cities where Gruh Finance largely operates? Do you see loan disbursements slowing in 2011?
The graph of real estate growth is almost the same, but there is a time lag factor in smaller centres. If market slows down in Mumbai, I promise you that in six months you will see slow down in smaller cities like Palanpur (in North Gujarat). This happens because investors — small or big — are everywhere. In 2011, we will have to wait and watch. The trend can only be gauged after first quarter data of calendar 2011. As the interest rates have started rising, there is a scenario where there is liquidity pressure in the market and RBI is likely to further tighten it, going forward.
What has been the penetration of Gruh Finance in Gujarat and other states?
Gruh Finance has achieved 93% penetration in Gujarat by servicing nearly 211 talukas. The company is trying to replicate the same story in neighbouring states. In Maharashtra, it has covered 260 talukas achieving a penetration of 65%. The company recently entered Rajasthan, Madhya Pradesh, Chhatishgarh, Tamil Nadu and Karnataka.