Festive season incentives to ensure growth in home sales despite rate hikes | The Financial Express

Festive season incentives to ensure growth in home sales despite rate hikes

Considering that the demand for homes is strong, the negative sentiment among buyers is likely to be short-lived.

Festive season incentives to ensure growth in home sales despite rate hikes
Developers are optimistic about sales because they believe that the current growth cycle is led by fundamentals such as strong buyer demand rather than speculation.

The recent increase in the repo rate by 50 basis points has taken interest rates back to the pre-pandemic level, making home loans expensive. Following the rate hikes in May, June and August of this year, banks have revised home loan rates upwards. The low interest rate era, which fuelled the high demand for homes, is now well over.

Home loan rates today are at around 7.4 per cent, after staying at around 6.6 per cent for the last two years.The impact of this interest rate hike on home loan borrowers varies. Fixed rate home loan borrowers are not impacted by interest rate hikes as the current interest rates are locked in for a part or whole of the tenure of their loans. Therefore, fixed-rate loan borrowers will not see an impact on their monthly EMIs or repayment amount. However, home loan borrowers, who took a loan on a floating interest rate benefitted when interest rates were low, will now have to pay more interest.

While there is no reason to panic yet about an impending slowdown in home sales, it is widely believed that another 30-40 basis points increase in repo rates will have a negative effect on home sales. The housing market is already starting to feel the impact of rising interest rates and high inflation, which has lowered purchasing power of home buyers.

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According to experts, home buyer affordability will shrink by around 10 per cent because of the rate hike. This essentially means that a buyer, who could afford a home costing around Rs 1 crore, can now afford to pay only Rs 89 lakh for a home. Homes are still selling, although there is a fear that another rate hike will create a negative sentiment among buyers. Many developers find themselves in a place, where they know they need to sweeten the deal for the buyer.

Incentives are returning to the market in response to housing affordability crunch and to restore consumer confidence. For the developer, incentives are a great way to attract buyers without reducing home prices. With the festival season approaching, it is likely that developers will offer freebies and other incentives to buyers. While festive season incentives are almost a regular feature, this year it could be the key to ensuring that the prolonged growth momentum in sales continues.

Developers are optimistic about sales because they believe that the current growth cycle is led by fundamentals such as strong buyer demand rather than speculation. Sales in the first half of 2022 (January-June) were the highest in over a decade and second only to the first half of 2010. The broad consensus is that in the short term, home sales may slow down, although the medium to long-term outlook still looks good.

This is because of a rising preference for home ownership among millennials. Millennials are a big percentage of first-time home buyers as they settle down and build families. The Covid pandemic was a wake-up call for many, including millennials, who are looking for a sense of permanence. Owning a home offers a sense of security and an increase in disposable incomes has made this possible. There is also a growing desire for larger and more spacious homes, given the work from home or hybrid model of working.

In the last few months, there has been a surge in demand for large homes, with dedicated office space, extra rooms, balconies, gyms and modern gadgets and appliances. This trend is expected to continue for the rest of the year. Demand is also strong for luxury and uber luxury homes, especially from the NRI community. A weakened rupee has increased the purchasing power of NRIs, who have shown interest in buying luxury homes in the cities and towns they originally belong to. NRIs have also shown preference for plotted developments, which has seen many developers entering this space.

There are some who worry that the rate hikes could not have come at a worse time. Global commodity prices of building materials such as cement and steel have increased, bringing with it fears that this would be factored into property prices, making homes pricier. The fears are, however, unfounded. Homes have historically been seen as a good investment and a hedge against inflation. The comparison that home buyers should really look at is the cost of ownership of a home compared to the cost of renting.

For home buyers, this is a good time to invest in property before home prices escalate or home loans become more expensive. Developers are confident that the incentives that will be on offer this festive season will attract many home buyers. Considering that the demand for homes is strong, the negative sentiment among buyers is likely to be short-lived. Real estate sector will continue to see growth this year.

(By Abhishiekh (Andy) Andlay, founder of Andlay Estates)

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