Is there a housing bubble?

House prices in six cities have registered double-digit increases since 2007, similar to the US, Ireland and Spain.

Regulators across the world are beginning to realise there is a link between financial crises and real estate prices. Considering banks had a big role to play in the sub-prime crisis, regulators are now concerned about spiraling home prices in India too. While banks and home owners refuse to acknowledge that home prices are near bubble levels, data seems to suggest otherwise.

Analysis shows some six cities have seen home prices go up in double digits since 2007, indicative of a bubble. In fact, in the second half of 2008, after the global financial crisis had begun, prices corrected in some markets but home prices in Mumbai, Kolkata and Faridabad continued to rise.

The National Housing Bank (NHB) has been tracking home prices across 15 Indian cities since 2007. The NHB-Residex shows prices have risen in most cities over the last four years. Prices in Hyderabad and Jaipur are lower than 2007 base level. In Bangalore, prices have jumped 37 per cent in one quarter alone. The Bangalore index jumped to 101 in October-December 2010 from 74 in July-September 2010. In four years, indices have doubled in Kolkata and Chennai.

In a report, STCI Primary Dealer has compared the increase in NHB’s Residex with that of housing indices in other bubble markets like Ireland, USA and Spain. In US, Case Shiller Index gives the price trends across 20 US cities. In January 2000, the index was at 100.59. It doubled in April 2006, marking a compounded annual growth rate (CAGR) of 12.1 per cent. The index has declined 31.4 per cent since the peak. In Ireland, too, housing prices index was around 33.6 in 1996, which peaked to 139.4 in 2006, marking a CAGR of 15.3 per cent. Prices have declined since then.

So, how have prices moved in India? Out of 15 Indian cities, eight have seen double digit CAGR increases since 2007. Kolkata and Chennai have registered higher growth than cities in three bubble economies of Ireland, Spain and the USA. Faridabad, Bhopal and Mumbai are very close to Ireland average as well.

Compared to growth in US Composite 20 Index, growth is seen higher in six Indian cities — Kolkata, Chennai, Faridabad, Bhopal, Mumbai and Ahmedabad. Clearly, double digit increase in home prices is indicative of a bubble, and regulators need to take cognizance of this, before it’s too late.

Source :- ( http://www.businessstandard.com/india/news/is-therehousing-bubble/437489/)

Five Home loan myths that you should bury

With the rising interest rates , the equated monthly instalments , or EMIs, have again a worrying factor for HOME LOAN customer.
The impact has been telling on many household's finances, which are already under strain due to the rising living expenses . While higher EMIs are a cause for consternation for borrowers, there could be relief in the form of certain clauses in the home loan contract.
Without understanding the clauses, you could fall victim to some general misconceptions about loans and shut out ways to lighten the EMI burden. Here are five myths regarding home loans that you need to be aware of:-

MYTH 1: HIKE IN INTEREST RATE MEANS INFLATED EMIs :-

The immediate reaction of many borrowers to an upward revision in a bank's base rate - and as a result the home loan rate - is that it will push up their EMIs, wreaking havoc on their monthly finances.
This, perhaps, is the biggest myth of all, especially when the rates are hardening. In fact, most banks, subject to conditions, usually extend the tenure of the loan and keep the EMI amount unchanged.
"Over an interest rate cycle, the tenure could go up and down, in line with the changes in the applicable interest rate," says Suvrat Saigal, consumer banking director, Barclays Corporate India.
"However, the decision depends upon factors like the age of the borrower and the property, his/her income and so on."
By default it's the tenure that is extended and the EMI amount sees no impact. Therefore, if you do not wish to prolong your loan repayment, you need to inform the bank about your willingness to service a higher EMI.
Remember, you are not helping your finances by extending the tenure.
"You actually pay a lot more in interest," suggests Vipul Patel, Home Loan Advisors. "It is generally recommended that you should try and part prepay, refinance or increase the EMI amount to ensure that the loan tenor can be reduced. Loan extension should be considered only in exceptional circumstances," he says

MYTH 2: PRE-PAYMENT ALWAYS ATTRACTS A PENALTY :-
Not always. "Typically, it is levied during the initial 3-5 years of the loan. The charge levied declines over time," says Saigal of Barclays India. "The nature, of course, varies as per the bank or the financial institution. Some banks may choose to charge it, some may not."
If you choose to repay the loan out of your own funds, you will have little to lose. As long as you have not opted for a home loan refinance from another lender, most financial institutions waive the prepayment penalty. "Most institutions allow up to 25% of the outstanding loan amount to be part prepaid in a financial year, but will charge anything from 2% to 4% for any amounts paid over the specified limit of 25%," says Patel.

"This is not aligned to the NHB circular dated October 18, 2010, which clearly says that there should be no charges in case prepayment/part prepayment/foreclosure is done with own funds." So, go through your sanction carefully to ascertain your lender's position.

MYTH 3: LOAN WITH LOWEST INTEREST RATE IS THE BEST DEAL :-
It may mean lower EMIs, but it may not serve your purpose if the loan amount sanctioned to you does not meet your requirement.
If your loan eligibility as per the lender's evaluation norms falls short, the low interest rate will be little consolation. Also, you need to go deeper to ensure that the bank is indeed offer-ing you the best deal. "I would urge customers to study charges like processing fee, inspection and valuation charges, etc, carefully," says Saigal.
While some banks charge a flat consolidated fee, others break it up into several categories. "At the entry point, the rate might look attractive, but there could be a number of strings attached such as higher fees, penalties on pre-prepayment and lower or no flexibility," says Patel.
"The key is to work out what product type and features best suit your financial needs and objectives first and then focus on the cost."

MYTH 4: BANK ISN'T CONCERNED ABOUT EMPLOYMENT STATUS:-
On the contrary, it is. "The home loan agreement stipulates that the borrower should keep the bank informed about change in employment, job loss, retirement, etc, within seven days," says VN Kulkarni, chief counsellor, Abhay Credit Counselling Centre.
The relevant, although rarely used, clause states: "Upon the borrower opting for retirement or ceasing to be in employment for any reason, then, notwithstanding anything to the contrary contained in this agreement or writings or any documents, the entire amounts payable under the said loan shall, at the bank's option, become forthwith due and payable by the borrower from the amount/s receivable by him from the employer."
"While the clause exists, usually the bank and the borrower, through negotiations, arrive at a revised repayment schedule based on the borrower's financial behaviour and repayment pattern," says Saigal.

MYTH 5: PROPERTY INSURANCE IS NOT BORROWER'S RESPONSIBILITY :-
You could be in for serious trouble if you believe so. A standard clause, yet often overlooked, in most home loan contracts is that the mortgaged house should be insured against fire and other natural calamities.
"If the borrower shall make any default in insuring and keeping insured the said property, the bank may without prejudice to its rights and without being bound to do so, insure and keep the same insured by debiting the loan account of the borrower. Such amounts shall also carry interest at the rate aforesaid," reads the clause.
"However, if you live in a co-operative housing society, which has insured the entire complex, you may be exempted," says Kulkarni. Those who live in individual units like bungalow or a row house should ensure that they carry out this task.

Source :- ( http://economictimes.indiatimes.com/personal-finance/loan-centre/home-loans/analysis/five-home-loan-myths-that-you-should-bury/articleshow/8594987.cms)

Home-Loan tips: TAX Savings As per section 80C ( A Bird's Eye view)

Home-Loan tips: TAX Savings As per section 80C ( A Bird's Eye view)

TAX Savings As per section 80C ( A Bird's Eye view)

To encourage savings/investments government gives tax breaks on certain financial products under Section 80C of the Income Tax Act to Tax Payer ( Any Individual , Hindu Undivided Family) . Section 80C will help to you save taxes on investments up to 1 lakh.

Below are the different options available under this section:

PF & VPF: Provident Fund (PF) is deducted from your salary. Your employer also contributes to it. While the employer's contribution is exempt from tax, your contribution is counted as investment under Section 80C. You can also contribute additional amounts to Voluntary PF (VPF).

Public Provident Fund (PPF): A PPF account can be opened with a nationalized bank or a post office. The rate of interest earned is 8%, which is tax-free, and the maturity period is 15 years.

National Savings Certificate (NSC): This is small-savings instrument for a period of six years. The rate of interest is 8%, compounded half-yearly. The interest accrued every year is liable to tax, but the interest earned is also deemed to be reinvested and, thus, eligible for tax deduction.

Equity Linked Savings Scheme (ELSS): ELSS schemes are tax-saving mutual funds. The returns are not guaranteed, since an ELSS invests in equities. The money invested is locked in for three years.

Life insurance premiums: Any amount you pay towards life insurance premium for yourself, your spouse or your children can be included for tax deduction. If you are paying premiums for more than one insurance policy, all the premiums can be included. Besides, investments in unit-linked insurance plans (Ulips), which offer life insurance with investment benefits, are also eligible for tax deduction.

Home loan:

(a) any installment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board or other authority engaged in the construction and sale of house property on ownership basis; or

(b) any installment or part payment of the amount due to any company or co-operative society of which the assessee is a shareholder or member towards the cost of the house property allotted to him; or

(c) repayment of the amount borrowed by the assessee from—

(1) the Central Government or any State Government, or

(2) any bank, including a co-operative bank, or

(3) the Life Insurance Corporation, or

(4) the National Housing Bank, or

(5) any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes which is eligible for deduction under clause (viii) of sub-section (1) ofsection 36, or

(6) any company in which the public are substantially interested or any co-operative society, where such company or co-operative society is engaged in the business of financing the construction of houses, or

(7) the assessee’s employer where such employer is an authority or a board or a corporation or any other body established or constituted under a Central or State Act, or

(8) the assessee’s employer where such employer is a public company or a public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society; or

(d) stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee,

but shall not include any payment towards or by way of—

(A) the admission fee, cost of share and initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming such shareholder or member; or

(B) the cost of any addition or alteration to, or renovation or repair of, the house property which is carried out after the issue of the completion certificate in respect of the house property by the authority competent to issue such certificate or after the house property or any part thereof has either been occupied by the assessee or any other person on his behalf or been let out; or

(C) any expenditure in respect of which deduction is allowable under the provisions of section 24 of Income Tax Act ( Interest paid in lieu of Housing Loan taken)

Fixed deposits (FDs): Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are entitled for tax deduction.

Others: Expenses on children's education can be claimed as deduction under Section 80C.

Scanning the fine print of a home loan

Buying your dream home can be very exciting, but don't rush through the paperwork so you can get your hands on that title deed. Remember your home loan may eat up a lion's share of your salary over many, many years. Scan your loan agreement thoroughly to understand what each clause implies before you sign on the dotted line.

Look out for

Rate of interest: The rate of interest determines the EMI or equated monthly instalment. The rate of interest, generally, can be of two types - fixed and floating though the latter is the most common these days. There is another addition to this category now called teaser loans which costs you less in the first few years.

Changes in Base Rate: Base rate is determined by an individual bank depending on various internal parameters including RBI's changes in repo and reverse repo rates. Banks cannot lend at a rate lower than the base rate. The floating interest rate would be the base rate plus a spread. The spread is the premium the banks charge from customers. The base rate is an important tool in a bank's armoury and often makes changes to it in response to the market conditions. The consumer is impacted due to this as interest rate changes with change in the base rate.

Reset clause: In the case of a fixed interest rate, the rate is usually fixed but there is a reset clause which allows banks to reset the fixed interest rate in relation to base rate at particular intervals.

Force majeure: This phrase means ‘greater force'. This implies that banks can raise the interest rates in exceptional conditions, even in a fixed rate loan. However, defining such a condition is left to the discretion of the bank.

Pre-payment penalty: The pre-payment clause explains the penalty that is charged if you decide to close the loan early by paying the amount due. Some banks do not impose any penalty while others differentiate this according to circumstances. For instance, when you refinance the loan through another bank opting for a lower interest rate such a pre-payment may involve a different and heavier penalty from the bank where you currently hold your loan.

Defining a Fault: For you a ‘fault' could simply mean not paying your EMI at some point in your loan tenure. However, some banks specify a fault as a case when the borrower expires, the borrower is divorced and stops paying (in case of more than a single borrower), or the borrower is/are involved in any civil litigation or criminal offence. Therefore, you must be clear about what your lender means by the term ‘fault'.

Security cover : This clause states that a bank is eligible to demand additional security when property prices fall. Such a demand could exist even if you are very regular with your EMIs. In such a scenario, if you are unable to provide a security cover in addition to your loan amount chances are that you could be declared a defaulter by the lender.

Interpreting the clauses

Remember that a borrower's goal is to get the loan at the least expensive interest rate while a bank's goal is to lend at a profit. Keeping this objective in mind, we will discuss the meaning of these clauses.

Teaser loan features: Teaser loans charge you less interest first and then increase it to the market rate.

If you are opting for this, make sure you understand the interest rate you will pay for the life of the loan. Most of the borrowers look at the next 1-3 years EMI and decide accordingly. The right way is to see the projected EMI after 3-5 years when the teaser rates are done with.

Floating rate loan: The banks increase floating interest rate as soon as RBI raises rates but do not lower it with the same enthusiasm.

Fixed rate loan: Though fixed rates are fixed over the period of the loan, banks insert a clause for resetting the fixed rate based on market conditions. Considering this aspect, it could be better to opt for a floating rate as you might get the benefit when market conditions turn favourable for a lower interest rate.

Pre-payment penalty: Discuss upfront with your bank about the prepayment penalty they charge and whether it works differently when you opt to prepay and refinance the loan.

Make sure everything is in writing. Currently RBI has already insisted on implementing a measure to do away with prepayment penalty completely.

Discuss this with your bank and see if you can avoid paying a prepayment penalty at all.

Points to note

- Try to arrive at a rough estimate of the effective interest rate you will need to shell out for your teaser loan and see if that can fit into your long term budget easily. Teaser loans can work to your advantage if you plan to close the loan in the short term i.e. 5-6 years.

- Though banks reduce interest rates as per the reduction in base rate it could still be applicable to new borrowers only. Again the RBI has stressed that the benefits should be passed on to existing customers as well, so figure out with your bank if that could be possible in your case.

Last but most important, document the discussion and take everything in writing. A home loan is too important to be taken on the basis of verbal assurances.

Source :- ( http://www.thehindubusinessline.com/features/investment-world/personal-finance/article1682663.ece?homepage=true)