As widely expected, the Reserve Bank of India hiked the repo rate again on Wednesday, taking it to 6.5%. With this, there could be some repercussions on housing uptake as home loan interest rates are likely to head further north.
“The rates had already crept up after five consecutive rate hikes over the last one year. This will add to the financial burden on homebuyers as apart from home loan interest rates, property prices have also inched up in the recent past two to three quarters. Given that interest rates may breach the 9.5% mark with today’s hike, we may see some pressure on sales volumes in the affordable and lower mid-range housing segments, which are more cost-conscious. The affordable segment has already been in the doldrums, and adding further to the cost of acquisition obviously does not help,” said Anuj Puri, Chairman, ANAROCK Group.
It may be noted that the monetary policy impacts real estate demand in several ways. When the RBI raises interest rates, borrowing costs for buying real estate increase, which can reduce demand for housing. Conversely, when interest rates are low, borrowing costs are lower, and demand for real estate may increase. Also, an expansionary monetary policy, which increases the money supply, can lead to increased consumer spending and borrowing, potentially driving up demand for real estate.
Also Read: RBI hikes repo rate again – What should home loan borrowers do now?
“Since the beginning of the rate hike cycle, which began in May 2022, the RBI has hiked its repo rate by 250 bps. With an MCLR rate of 8.4%, about 60% of the repo rate hike, so far, has already transmitted into the lending rates. Thus, the borrowing costs have significantly increased across the product categories, including the housing sector. Post today’s rate hike, borrowing costs could be expensive by another 10 – 15 bps, on an immediate basis,” said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
The pricing index of the affordable housing segment will have detrimental cascading impact due to projected sticky core inflationary trend. Though surplus liquidity will power credit growth in the real estate sector, demand economics may be challenged in the affordable house segment – which is the broad spectrum of the consumption pyramid.
“The outrageous hike of 250 basis point since May 2021 needs to be warranted before it turns negative for the ascending Indian economic growth curve. The impact of home loan interest rate hike will be highly deterrent in the affordable housing segment as it will impact the price sensitive homebuyers and fatigue the supply of developers. The luxury and mid housing segment players will remain cautious with a bit longer sales cycle,” said Dr Niranjan Hiranandani, National Vice Chairman, NAREDCO.
Some consultants, however, were of the view that despite the rate hike, housing demand will not get impacted much.
Amit Goyal, CEO, India Sotheby’s International Realty, said, “Inflation is still above RBI’s comfort levels and considering the evolving inflation outlook, it’s important to ensure inflation remains within the tolerance band and progressively aligns with the target. The good news is that amid volatile global developments, the Indian economy remains resilient and is expected to grow at 7% in FY23. While an increase in repo rate will certainly increase the home loan interest rates, we are optimistic and expect the housing demand to remain intact.”
“If inflation continues to show positive outcomes combined with encouraging high performance economic indicators, we hope to see fewer rate hikes or negligible rate hikes by the RBI, going ahead. Home loan interest rates are already in the higher bracket of 8-9% in recent times. Further, housing prices are expected to largely remain firm in the upcoming quarters. On the optimistic side, we hope not to foresee a further rise in the repo rate and a resultant increase in loan rates. This will help sustain the demand and confidence of homebuyers in the market,” said Ramesh Nair, CEO, India and Market Development, Asia, Colliers.
Industry experts feel that confidence in the economy is closely tied to the monetary policy. When the central bank is seen as effectively managing the economy and maintaining stability, it can increase consumer confidence and demand for real estate.