The cumulative hike in repo rate since May now stands at 140 basis points and housing loan rates have already been moved upward by lenders after the first two hikes in May and June.
Following the surprise hike in repo rate in May, the home loan rates have already moved up from their all-time lows that have been helping key property markets surpass pre-Covid levels and witness record sales. With hardening interest rates, realtors will now have to provide offers to stimulate and maintain the momentum of demand.
“As the home loan borrowing is at the flexible rate, short term interest rate spike will certainly hurt the homebuyers’ sentiments, but it averages out the cost positively in the long term. Developers are conscious about the inflationary pressure building up with the spiralling economic discord and will chalk out deal sweeteners on the back of festive tailwinds,” said Niranjan Hiranandani, National Vice Chairman, NAREDCO.
Currently, home loan rates are hovering around 7.4% after staying at a decadal low of 6.6% for the last nearly two years.
“Likely transmission of another 30-40 basis points increase in home loan rates may cause some mid-cycle slowdown for the residential sector and likely result in some ripple effect on the upcoming festive season. This could see some short-term disruption to the sales growth momentum,” said Samantak Das, chief economist, and head of research and REIS, India, JLL. “It is however a note of caution and not a reflection on the overall residential sector’s health, with the medium to long-term growth prospects remaining intact.”
India’s residential sector is in the middle of a prolonged and sustained growth cycle much similar to the 2010-2012 period, but more driven by real market fundamentals in terms of homebuyer demand. In fact, sales in the first half of 2022 (January-June) were the highest in over a decade on a same-period comparison and second only to the first half of 2010.
“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,” said Shishir Baijal, CMD, Knight Frank India. “The increase of interest rates and the subsequent transmission of these into the home loan rates, while having 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.”
According to him, with the cumulative rate hike until today, assuming complete transmission, prospective home buyers’ affordability shrinks by around 11% i.e. from the ability of purchasing a house of Rs 1 crore value shrinking to Rs 89 lakhs now. Developers are expected to undertake mitigating measures to soften this blow on homebuyer affordability.
With the reversal in interest rate cycle, concerns over its likely impact on slow demand patterns have started to worry developers who are seeking government’s intervention.
“The sharp acceleration of rates consecutively for the third time in a short period may have a short-term effect on the sentiment of homebuyers as low interest rates have been the biggest factor in the resurgence for real estate demand in the last two years. We hope that the state government will step-in to lighten the homebuyer’s load by reducing stamp duty ahead of the festive season,” said Pritam Chivukula, Treasurer, CREDAI MCHI.
Measures including reduction and freeze in stamp duty and ready reckoner rates, which are under state government’s control, helped the real estate sector across various states including Maharashtra, Karnataka, West Bengal, Delhi, Madhya Pradesh during the pandemic.
