Is housing sensitive to the rate cycle?

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Housing loans show greater sensitivity to interest rate changes than auto loans. (Reuters) Housing loans show greater sensitivity to interest rate changes than auto loans. (Reuters)
SummaryHousing loans show greater sensitivity to interest rate changes than auto loans.

1 lakh for an auto loan (for 5 years at 10 per cent) is Rs 2,125, while the same for a home loan (for 20 years at 10 per cent) is Rs 965, in a hypothetical scenario where both the interest rates are the same.

If we were to compare home loan and auto loans under a falling interest rate regime, for every 1 per cent drop in Interest rates, the EMI for a Rs 5 lakh loan decreases by Rs 260 whereas the EMI for a Rs 30 lakh home loan decreases by Rs 2,160. As it can be seen the impact of a similar drop in interest rates is much higher in the case of the home loan.

Also, since a home loan is a long term loan, this translates into a much higher credit eligibility for a home loan for an end user as compared to an auto loan. Hence, home loans are impacted to a greater extent with a small decrease in interest rates as compared to an auto loan.

With increasing loan eligibility amounts, the purchasing power gets a bigger spurt. The interest impact hence gets magnified for a home loan as compared to an auto loan.

There are other macroeconomic factors governing the housing sector in particular. A very important factor is that rural housing and rural housing finance are a priority sectors as per National Housing Bank. We as financiers have an unsaid responsibility of supporting housing development in rural areas, and provide more impetus towards this sector.

The author is MD, Tata Capital Housing Finance Limited

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