NEW DELHI: The decision by India's central bank, the Reserve Bank of India (RBI) -- to increase repo rate by 50 bps -- will pinch homebuyers as commercial banks will now go for one more round of interest rate hikes. Following last month's hike of repo rate by 40 bps, banks have already increased interest rate on home loans by 30-40bps.
"From a real estate perspective, home loans are set to get costlier. Banks have already raised the interest rate on home loan by 30-40bps since the earlier repo rate hike by the RBI in May and now with the repo rate cumulatively higher by 90 basis point there will be further increase in interest rate for homebuyers. Rising interest rate along with elevated property construction cost and product price pressures could adversely impact on the real estate buyer’s sentiment," said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
The RBI has raised the repo rate by 50 basis points, an increase for the second time in five weeks, at the conclusion of the Monetary Policy Committee's (MPC) three-day meeting on June 8. With this 50-bps change, the repo rate stands at 4.9%. There are major chances that it may be revised upward again this fiscal to control the rising inflation.
Anuj Puri, Chairman – ANAROCK, said that a hike was inevitable, but we are now entering the red zone and any future hikes will reflect markedly on housing sales. "The RBI is tasked with controlling the spiralling inflation in the country but must simultaneously be careful to not hurt demand recovery," said Puri.
According to Puri, interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12% and above. Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments.
He had previously told The New Indian Express that housing sales may witness a 10% sequential decline in the second quarter of CY2022 on account of increasing interest rates, inflationary pressure and rise in building material costs that have pushed property prices. Q1 2022 has been one of the best quarters in terms of housing sales since 2015. ANAROCK data indicates sale of 99,550 units across the top 7 cities.
Ram Raheja, Director at S Raheja Realty, said that as the inflation is expected to remain above the RBI upper range tolerance level of 6% till December this year; it will certainly have some repercussions on housing uptake. "The RBI is focused on controlling the escalation of inflation in the country but must simultaneously be careful to not hurt the growth of the real estate market."
What other Real Estate Industry experts said:
Anurag Mathur, CEO, Savills India feels "the second scheduled Monetary Policy Committee (MPC) meeting of the fiscal year, on expected lines, increased the benchmark lending rates by 50 basis points, taking the cumulative increase to a significant 90 bps in the initial few months of FY23. Brent crude prices breaching USD 120 per barrel and domestic retail inflation at an 8 year high in April have played a pivotal role in recalibration of growth prospects. With geopolitical tensions resulting in globalisation of inflation, the World Bank and RBI have revised India’s GDP growth rate to 7.5% and 7.2% respectively for the ongoing fiscal year. Leading private and public sector banks have already passed on the previous repo rate hike, by increasing home loan interest rates by 30-40 bps across loan categories. The increase in benchmark lending rates by 90 bps in a short span of time, coupled with the anticipation of further rise in coming months will increase the home loan EMIs significantly as compared to the previous fiscal year. Thus, of all residential real estate segments, the impact on EMI dependent affordable segment will be highest. Noteworthily, the increase in cost of borrowing is expected to be tangible for developers on the supply side as well."
Kenish Shah, Co-Founder, PropReturns, observed that "the further bump in the Repo Rate to 4.9% to battle inflation will bring huge investments into the real estate industry. Savvy investors will now stray away from fixed-income investments such as FDs and government bonds that are losing to inflation. The smart move at this point will be to diversify their portfolio using higher-yielding assets like Commercial Real Estate. As seen in patterns before, rental yields in commercial real estate will be pushed up due to the sudden hike in interest rates and will become a powerful wealth creation tool for many investors. The hike in interest rates is a boon for the real estate industry."
Ramani Sastri, Chairman & MD, Sterling Developers, said "we have observed a robust comeback in residential sales and launches in the last couple of quarters. From a real-estate perspective, this hike in the policy rate comes as a hurdle as home loan rates will increase, putting a dent on the homebuyer's sentiments. Any increase in the interest rate will further impact the costs of doing business and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic. However there has been a fundamental change in buyers expectations and attitude towards homeownership and this will largely withstand marginal fluctuations in lending rates. It also goes without saying that the real estate industry's perennial hope is fixed on lower interest rates as it improves affordability. There is still pent-up demand and even after the repo rate hike, affordability is still high and the home buyer needs to take advantage of that in the short term. Going forward, we hope that the government continues to pay attention to the requirements of the sector, which is one of the largest employers in the country. We believe the long-term structural growth story of India is intact and will continue to drive overall demand and consumption for key sectors of the economy."