Home Loan rates cut! Will Home prices come down too?

I commented on my other blog "Economics for common man" on 15th October about a possible cut in home loan rates. The same is not happening in the way I predicted but is happening in somewhat unexpected way i.e. through Indian Banking Association (IBA) decision to act on RBI's action to cut risk weightages on home loans (below 20 lakhs only) and subvention (read subsidy to banks) on loans below Rs 5 lakhs (Read in ET here and Rupee Times here) . Welcome move but what remains to be seen is that how'd this happen. Deposits rates are still hovering ~ 10-11% with most of the banks which will create a good arbitrage opportunity for next few months for people sitting on cash.

Another interesting thing is that new homes in that range i.e. below Rs 20 lakhs are just not available in cities like Mumbai and Delhi and therefore this benefit shall only be for home loans for people in Tier-II and smaller cities like Jaipur, Chandigarh etc.

It'd also be worthwhile to note that ICICI Bank recently declared that it will reduce interest rates on new home loans below Rs 20 lakhs to 11.5% from 13% (hiked just 1 month ago, read here on Domain-B and here on ET ). This is making existing home loan borrowers suffer like anything (read comments below these articles). I think it is simply making people more aware of guiles of private sector banks who in order to maintain short term shareholder returns compromise on millions of customer relationships who shall never deal nor recommend them to anyone in future.

Now, the ultimate question. Will new home prices drop any further? Well, the answer is yes for the ultra expensive ones where no bank would be cofortable lending till buyers fork out a huge margin but home prices of new homes under Rs 20 lakhs will only rise and Builders would like to capitalise on this opportunity by jacking up prices of inferior new homes in that bracket in Tier-II and smaller cities and making their sales force guile people into buying loans at very attractive "new home loan rates". There may be some good offers too but chances of that seem slim. Therefore, one needs to be very careful in wake of these facts while making a new home purchase decision especially in sub Rs 20 lakh category. In the high-end homes, people'll continue to have bargaining power with realty companies who'd like to take out money from expensive and luxury homes, probably drop some projects and come out with smaller and smaller new homes