The Reserve Bank of India (RBI) on September 30 announced a 50 basis points hike in the repo rate stepping up its fight against high inflation. This, say real estate experts, is on expected lines and may impact affordability of purchasing homes and lead to higher equated monthly installments for homebuyers. It may also have a moderate impact on housing sales this festive season, particularly in the affordable and mid-range housing segments.
Experts also caution that if this rate hike sustains, one would have to be careful and watch for the impact it will have on economy and the sector from next year onwards.
What this means is that on a Rs 30 lakh home loan with a 20-year tenure, taken in April 2022 at 7.05 % for which the EMI was Rs 23,350, the 190 bps increase in repo rate till today from April will translate to an interest rate of around 8.2 % and EMI will increase to Rs 25,500. This means an increase of over 9 % in the last six months in monthly outgo.
"The repo rate hike does not augur well for the real estate sector, especially the residential segment as it will result in increased mortgage rates. The transmission of change in repo rate is based on individual bank’s decision. Since April 2022, RBI increased the repo rate by 140 bps, while home loan rates moved up by an average of 80 bps - more than 50 % has been transmitted to date. Taking a cue from the previous transmission, we expect the home loan interest rates to go up in the range of 25-30 bps," said
However, the interest rate after this hike would be still below what the homebuyers had to pay 8 to 9 years back- more than 10 %. It is likely that banks might also delay the transmission, taking into account higher housing demand during the festive season. Sales of residential units have increased by more than 2x during the first half of 2022 vis-à-vis same period last year and the growth trajectory is maintained during July-September quarter," said Samantak Das, chief economist, and head of research and REIS, India, JLL.
"With today’s hike in repo rate, the revised home loan EMI would increase by an average of 8-9 % as compared to 6 months back. The continuous rise in home loan EMI is hence, expected to act as a sentiment disruptor. We believe that home loan interest rates inching towards 9% and above may result in moderation of housing sales growth in the medium term, especially post the current festive season," he said.
Hike on expected lines
“The 50 BPS hike by the RBI was expected, especially since no global economy has hinted towards any kind of moderation. Inflation continues to ravage almost all economies, and India is no exception. With this repo rate hike, home loans will get dearer soon. This could impact residential sales to some extent during the upcoming festive quarter, particularly in the affordable and mid-range housing segments,” said Anuj Puri, chairman, Anarock Group.
“The hike in home loan rates will be in addition to the other increasing costs such as inflationary trends of construction input costs. With the overall acquisition cost increasing further, developers will have to seriously consider doling out targeted offers and discounts to boost sales during the critical festive quarter,” he said.
ANAROCK's recent Consumer Sentiment Survey also highlighted that at least 61% respondents saw high inflation as a major concern for them, seriously impacting their disposable incomes. The silver lining is that only when the home loan interest rates breach the 9.5% mark will housing sales see a ‘High Impact’. If rates remain between 8.5-9%, the impact is expected to be moderate.
“Currently, we do not see an impact on the business, as demand for new properties remains buoyant during the festive season that extends over the next two quarters. While we are in a good position, we have to see the sustainability of continued rate hikes, especially from Q1 2023. If this rate hike sustains, then we will have to be careful and watch for the impact it will have on economy and business from next year. The Government and the RBI will have to be cautious about not compromising growth while managing inflation,” said Abhishek Kapoor, CEO, Puravankara Limited.
Rising interest rates are likely to translate into higher equated installments and put more pressure on the final demographic unit at the household level. RBI’s steely resolve to restore price stability is likely to result in temporary pain-points across economic sectors especially automotives and residential real estate, where mortgage-based end-user purchase is highly prevalent, said Anurag Mathur, CEO, Savills India.
“On the brighter side for real estate sector, office markets have signalled the beginning of a growth stage. 2022 is likely to witness 55-60 mn sq.ft. of leasing activity in the country. The warehousing and logistics sector stands to benefit from the recently launched National Logistics Policy, which aims to streamline shipping, and lower logistics costs throughout the country. Meanwhile, REITs in the country have received a further boost, with SEBI allowing them to raise funds through short-term commercial papers,” he said.
“While this is expected in line with the global trend, it will have its impact on the sentiments across all buying categories, especially in the wake of the current festive season,” cautioned Shishir Baijal, Chairman and Managing Director, Knight Frank India.
Tight liquidity conditions along with the repo rate hike would lead to a significant rise in the cost of funding, impacting home loan rates as well. Going by the current trends we expect about 50 % of this will be passed onto the home loan borrowers, he said.
A rise in home loan rates will further impact affordability across the markets. As per Knight Frank affordability index will deteriorate by another 2 %. This might slowdown home buying decision for a short to medium term, he said.
Ramesh Nair, CEO, India and Managing Director, Market Development, Asia, Colliers, is of the opinion that demand may not get impacted.
"RBI hiked the repo rate for the fourth time in a row by a further 50 bps to 5.9 % as the government remains committed to tame inflationary pressures amidst global headwinds. However, domestic economic activities remain promising, thus providing the Central Bank with the required elbowroom to continue withdrawing its accommodative stance. Resultantly, RBI slightly moderated its growth target to 7 % for FY 2022-23,” he said.
In response, banks are expected to continue raising their home loan rates in the next few months. With the festive season in the offing, developers are likely to dole out attractive schemes to attract fence sitters and first-time homebuyers. As the rate hike was on expected lines and the market has largely recovered from the pandemic lows, the home buying sentiment is not likely to be impacted significantly, he said.
Manoj Gaur, president, CREDAI-NCR and CMD, Gaurs Group, said that it may have a marginal impact on the real estate sector but wished that RBI had deferred this increase for the post-festive season. The buyers sentiments so far has remained buoyant towards residential real estate signalling the preference for real estate as an asset class. “We are confident the buoyancy will remain intact,” he said.
“This would be a setback for the middle-income-group homebuyers as it would again cost them more than the previous annum. However, this is an efficient step to curb inflation as there is an overall increase in input costs across the globe. We look forward to avoiding any major gap between builders and buyers due to this hike,” said Amit Modi, president CREDAI Western UP and Director ABA CORP.
Demand for luxury homes to remain intact
“We don’t see a significant impact on the luxury housing segments due to the current increase in repo rate hikes as the demand of home buyers in this segment is beyond these considerations. The impact of rate hike will be predominantly on the affordable housing side, which is primarily driven by sentiments and especially first-time home buyers who are heavily reliant on home loans,” said Lincoln Bennet Rodrigues, chairman and founder, The Bennet and Bernard Company, known for luxury themed homes in Goa.