Home prices set to moderate in 2022 due to affordability challenges

High interest rates and the rise in home prices seen during the last two years are creating affordability challenges for many buyers, which could lead to a slowdown in home sales and the rate of home price increase.

Home prices set to moderate in 2022 due to affordability challenges
In case there is a slowdown in the economy this year, the housing market should be prepared for a cool down, after two years of relentless rise in demand, which pushed home prices higher.

The home buying frenzy that had gripped the real estate market in the last two years is all but over. Interest rates are rising again and with the housing market being rate-sensitive, home buyer demand is waning. High interest rates and the rise in home prices seen during the last two years are creating affordability challenges for many buyers, which could lead to a slowdown in home sales and the rate of home price increase.

During the pandemic time, there was a housing boom driven by low supply of homes and high demand from home buyers. Affordability of home buyers was high because of historically low interest rates. All this has changed now. Today, India’s inflation rate is at its highest level since October 2020. In response to the rising inflation, the Reserve Bank of India has raised the repo rate twice since May this year. Repo rate is the rate at which the RBI lends to commercial banks. When repo rate increases, banks increase the interest rates on loans. Home loans have become expensive, and this has had a negative impact on the home buying ability of buyers.

Buyers are finally feeling the impact of the appreciation in home prices seen in the last two years. Affordability issues are forcing home buyers to rethink their buying decision. RBI’s own data shows that the demand for home loans is slowing down, implying that the interest rate hike has negatively impacted home loan demand. While a housing crash of the kind seen in the year 2007 may not happen, some micro markets in the country could see a decline in home prices.

The problem is not demand but affordability. There is still interest in homes, especially from first-time home buyers, but the increase in interest rates has taken some of the steam out of the market. This could lead to a moderation in home prices in some micro markets, depending on the level of inventory and demand.

In case there is a slowdown in the economy this year, the housing market should be prepared for a cool down, after two years of relentless rise in demand, which pushed home prices higher. This however does not mean that buying a home will become more affordable for the prospective home buyers. Home prices are still stable, although the price rise is now happening at a much slower rate. A substantial deceleration in home price growth will happen only if the economy weakens further.

It is safe to say that the buying frenzy seen during the pandemic has ended. House price growth will moderate this year, although prices could still be positive. Having said this, any more increase in home loan rates will worsen the affordability of buyers. And this could set the momentum for a fall in home prices to retain buyer demand. In any case, the rate of home price increase seen in the last two years was not sustainable and it had to stabilize.

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

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