Contrary to industry expectations, the Reserve Bank of India hiked the repo rate by 50 bps on Friday. The repo rate now stands at 5.4 per cent, thus reaching the pre-pandemic levels.
Commenting on the same, industry experts said a rate hike was expected, but the expectation was for a maximum of 35 bps. The hike by 50 bps is definitely on the higher side, and home loan lending rates will now edge further into the red zone.
“This is the third consecutive rate hike in the last two months and finally marks the end of the all-time best low-interest rates regime – one of the major factors that drove housing sales across the country since the pandemic. This whammy comes along with the inflationary trends of primary raw materials, including cement, steel, labour, etc., that have recently led to a rise in property prices. Together, these factors – rising home loan rates and construction costs – will impact residential sales that did reasonably well in the first half of 2022,” said Anuj Puri, Chairman, ANAROCK Group.
As per ANAROCK Research, close to 1.85 lakh units were sold in H1 2022 across the top 7 cities of the country.
Property consultants feel the RBI has been compelled to take steps to control India’s consumer inflation which has remained above the tolerance level of 6%. So far commercial banks have transmitted the policy rate hike to the borrowers, resulting in an increase in lending rates across all the sectors, including real estate. Today’s rate hike will further harden the rates.
Shishir Baijal, Chairman & Managing Director, Knight Frank India, said, “For the real estate sector specifically, the third subsequent rate rise will mean a deterioration of affordability and may impact the sentiments of home buyers. With the cumulative rate hike until today, assuming complete transmission, a prospective home buyers’ affordability shrinks by around 11% i.e. from an ability of purchasing a house of Rs 1 crore value shrinking to Rs 89 lakh now. Developers are expected to undertake mitigating measures to soften the blow on homebuyer affordability. The increase of interest rates and the subsequent transmission of these into the home loan rates, while has the capability of impacting demand, we hope that the latent demand for housing will soften the impact of the latest change in the Repo rates.”
“The new rate, which is 5.40 per cent, will ultimately impact the cost of borrowing for India’s homebuyers. However, it is also pertinent to note that past rate hikes and the consequent increase in home loan rates have so far not had any discernible negative impact on the burgeoning demand for homes. We believe that positive buyer sentiment coupled with the renewed interest of investors in residential real estate will cushion some of the adverse impacts of the rate hike,” said Dhruv Agarwala, Group CEO, Housing.com, PropTiger.com & Makaan.com.
Shrey Aeren, Managing Director & Country Head of Berkshire Hathaway HomeServices Orenda India, said, “A 50 bps hike in the repo rate raises it to 5.4 per cent, which though appears marginal and brings it at par with the pre-pandemic levels. However, if the banks follow suit and increase home loan rates by the same percentage points, it might affect housing sales. In that case a 7.55 per cent interest rate would increase to 8.05 per cent and the borrower would have to pay extra Rs 1545 every month on a loan of Rs 50 lakh. The increased cost of borrowing would also make the construction of housing projects costlier for the developers, ultimately putting the price pressure on the end users.”
Some industry experts said that with this third consecutive hike in the repo rate, we are now back to pre-pandemic levels, highest since August 2019. However, this is unlikely to impact the demand momentum in the housing segment.
“Home loan rates are now expected to settle around 8% per annum, which can put a short-term psychological dent on the demand for the mid and affordable housing segment, but we won’t see that continuing for long. We are still in the comfort zone of a single-digit rate. With pent-up demand for housing post-COVID, strong economic growth and a steady job market, we expect the demand momentum to continue in India’s housing segment, especially in the top 6 cities, where office leasing and absorption has been strong,” said Amit Goyal, CEO, India Sotheby’s International Realty.