New Delhi: Slowdown in the housing sector in metros seems to have spilled over to small towns, where housing demand fell by 25 percent during February-July 2008 period because of higher cost of borrowing, according to an industry lobby report.

The study by the Associated Chambers of Commerce and Industry of India (Assocham) said realty transaction has gone down by nearly 25 percent in most of tier II and tier III cities between February and July 2008.

These small boomtowns registered a growth of around 22-23 percent in property purchase in the same period last year.

Assocham secretary general D.S. Rawat said: "Approximately 15 million people in about 30-40 tier II and tier III cities were unable to make purchases as higher inflation and interest rate have dampened their enthusiasm and eroded their budget."

"Also higher borrowing cost has compelled most of real estate developers to defer their projects," he added.

The Assocham study is based on feedback from affiliated real estate majors like Parsvnath, Omaxe, DLF, Unitech, and BPTP, which are developing projects in small towns.

Besides rising cost, non-availability of inputs such as bricks, cement and steel, and power shortage also cause inordinate delays in project completion.

The chamber has urged the government to introduce real estate investment trusts (REITs) to bring the much needed class of institutional investors to strongly support the domestic real estate market.

According to the Assocham, REITs can also help develop commercial mortgage backed securities (CMBS) market and create a source of cheaper debt for commercial real estate.