EMIs for home and car loans are expected to cost more after the Reserve Bank of India (RBI) raised the repo rate by 50 basis points to 4.9% on Wednesday.
A rise was inevitable given that inflation continues above its target zone of 6%, but we are now entering the red zone, warns Anuj Puri, president of real estate consultancy ANAROCK. “Any future rise will have a marked impact on home sales,” warns Puri.
This, according to Puri, will have implications for housing adoption.
The rate hike will push up interest rates on home loans, which had already started to climb after last month’s surprise monetary policy announcement, Puri said. “Interest rates will remain lower than during the global financial crisis of 2008, when they reached 12% and more. Nevertheless, the current increase will be reflected in residential sales volumes in the coming months, more so in the affordable and intermediate segments.
However, the silver lining is that India’s housing market is still largely end-user driven, so there is no investor mentality looking for the lowest possible entry point, he adds. -he. “The real demand comes from an underlying yearning for homeownership.”
“The RBI is tasked with controlling the spiraling inflation in the country, but must simultaneously ensure that it does not harm the recovery in demand. It is a tightrope walk at the best of times,” Puri says.
This comes at a time when average residential housing prices in India increased by 4% year-on-year in the first quarter of 2022, while unsold inventory fell slightly, signaling a recovery in demand.
“We have seen a strong comeback in residential sales and launches over the past two quarters. From a real estate perspective, this key rate hike is a headwind as home loan rates will rise which will weigh on buyer sentiment,” said Ramani Sastri, President and CEO of Sterling Developers Pvt. . ltd.
Any increase in the interest rate will further impact the costs of doing business and therefore the move will also hurt business sentiment as the economy is still recovering from the pandemic, he adds.
Sastri, however, says there has been a fundamental shift in buyers’ expectations and attitude towards home ownership and that this will largely resist marginal swings in lending rates. “It also goes without saying that the real estate industry’s perennial hope is set on lower interest rates as it improves affordability. There is always pent-up demand and even after the repo rate hike,” he says.
The current series of hikes could make buyers nervous and they might as well adopt a wait-and-see attitude, says Lincoln Bennet Rodrigues, founder of The Bennet and Bernard Company, a luxury property developer in Goa.
However, continued wage and employment growth in various sectors will provide a short-term cushion for buying decisions, Rodrigues adds.
The historically low regime of interest rates on home loans in the recent past has boosted housing demand and also enabled a robust recovery in the real estate sector after the pandemic.
Rodrigues hopes an improvement in buyer attitudes and home ownership preference will support the housing market and sustain consumer demand in the near term. “The rate hike will not have a significant impact as home loan interest rates have already come down significantly lately and buying decisions may not be affected by these marginal changes. The outlook for India Inc look positive with higher affordability and disposable income in the hands of new era investors,” he adds.
The two rate hikes in the past 45 days will affect consumer and business sentiment, said Harsh Vardhan Patodia, chairman of CREDAI, a property developer lobby. With consumer loans and home loans becoming more expensive, there could be an impact on demand in the short term, he adds.
Patodia, however, welcomed the 100% increase in the limit for individual housing loans by Urban Cooperative Banks (UCBs) and Rural Cooperative Banks (RCBs) as overall construction prices soared over the of the last six months.
The proposal to allow rural cooperative banks to extend financing to commercial real estate within the current limit of 5% of their total assets will bring more financing into real estate, Patodia said.