NEW DELHI: A 50 bps hike in repo rate will have a direct impact on housing sales as interest on home loans offered by financial institutions will see another hike this year. This is the third straight rate hike in the last two months, marking 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 Covid-19 pandemic.
The Reserve Bank of India (RBI) Governor Shaktikanta Das-led Monetary Policy Committee (MPC) hiked the policy repo rate (the rate at which banks borrow money from the RBI) for the third time in a row on Friday, in order to control the inflationary pressure. RBI has hiked the repo rate by 50 bps to 5.40% with immediate effect and now it is back to pre-pandemic levels, and at the highest since August 2019.
Anuj Puri, Chairman – ANAROCK Group, said 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 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. As per ANAROCK Research, approx. 1.85 lakh units were sold in H1 2022 across the top 7 cities," said Puri.
Shishir Baijal, Chairman and Managing Director, Knight Frank India, said that Friday's rate hike will further harden the lending rates.
"In terms of liquidity, the measures have cut the extent of the liquidity window. However, adequate liquidity is managed, and improved manufacturing capacity utilisation will be supportive of credit growth going forward. 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 Bajal.
He added, "With the cumulative rate hike until today, assuming complete transmission, a prospective home buyers’ affordability shrinks by around 11% i.e. from an ability to purchase a house of Rs 1 crore value to only being able to purchase one valued at Rs 89 lakhs now."
According to Baijal, developers are expected to undertake mitigating measures to soften the blow on homebuyer affordability.
Amit Goyal, CEO, India Sotheby's International Realty, said that 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 it won't continue 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 residential housing segment, especially in the top 6 cities, where office leasing and absorption have been strong," said Goyal.