A consistent uptick in the US economy has led the Federal Reserve hike interest rates in March 2018. Now, how will this impact the real estate sector and home buyers in India?
A consistent uptick in the US economy has led the Federal Reserve hike interest rates in March 2018 by 25 basis points to 1.75 per cent. The hike was notable given that it came consecutive to the December 2017 meet and left no doubt about the hawkish stance taken by the central bank. There is this widespread notion that the rates will be hiked further during this year.
Now the question is: how will this impact the real estate sector and home buyers in India? Well, experts in the Indian financial sector say that the move is sooner than later going to be mirrored in India by the Reserve Bank, and the consequent impact will cascade down to the home finance sector. There is a reason to pay credence to this forecast, given a few factors that have motivated the financial market here, in recent times.
Up until a while ago, the interest rates have remained unchanged for a fairly long time. Given how the Reserve Bank of India (RBI) let the consumers enjoy a low mortgage interest for such a long period, it has led to further speculation that a shakeup of the market may be in tow. The 2nd half of CY2018 is expected to see this change in the interest rates. However, much will rest on the level of inflation, which if goes beyond the current levels of 5-6%, will give the RBI a reason to tighten the interest rates.
Besides the domestic reasons, the apex bank as well as the government will also account for the fact that the strength in the world’s largest economy, i.e. the US, will encourage global investors to divert their funds from India to the US and thus India will require to offer better returns and interest rates in order to keep its attractiveness as an investment destination.
Until the first half of 2017, there was a notion that the RBI would further slash the interest rates in order to further accommodate the excess liquidity caused by demonetization, among other factors. However, the key interest rates remain stable and no cut was introduced in the past three quarters.
This stance from the central bank has clearly signalled that there is no reason for the industry as well as home buyers to expect any further cuts and the current levels should be taken as the bottom. With this, those who were waiting for another cut in interest rates will rejig their expectations and take buying decisions. This is something we have experienced in the Jan-Mar’18 quarter, wherein the real estate sales picked up substantially for a number of projects, especially in the NCR market which was facing the slowdown for a long time.
On the flip side, it is assumed that a section of home buyers may be discouraged from applying for a home loan, owing to the higher interest cost they might have to bear in case the rates go up.
As mentioned above, the interest rate hike may be a means for the RBI to manage the outflow of capital to other turfs. However, it needs to be noted that the key interest rates in India are anyway much more than the levels of 1.5-2% prevalent in the US, and India would remain a high-growth market for the coming years as well.
The forthcoming elections in 2019 may be yet another reason the government may decide to avoid unrest and keep the interest rate regime stable. In overall, this is probably the best time for the home buyers to take a call.
(By Ankush Jain, Managing Director, Bullmen Realty)