Real estate demand may take a hit this festive season after RBI’s rate hike

• As home loans get dearer, developers expect impact on festive demand.
  
• Higher interest rates are likely to impact first-time and affordable home buyers the most.
  
• Demand for luxury and premium properties may not be as affected.

Demand for property could take a hit this festive season, as India’s central bank has hiked interest rates by another 50 basis points. Rising inflation and steady increase in interest rates have made the cost of acquisition of real estate more expensive.

The Reserve Bank of India has hiked interest rates by 190 basis points in the last five months, which substantially increased borrowing costs for home buyers.

Developers are of the view that demand for property could be hit in the ongoing festive season as buyer sentiment could take a hit. Anarock’s recent consumer sentiment survey also highlighted that at least 61% people saw high inflation as a major concern which is seriously impacting their disposable incomes.

“With this repo rate hike, home loans will get dearer soon. This could impact residential sales to some extent during the upcoming festive quarter, particularly in the affordable and mid-range housing segments,” said Anuj Puri, chairman at Anarock group.
How is it going to affect the demand for real estate properties?
Inflation has already eaten into the average consumer’s wallet and rising interest rates will add to the burden. As home loan interest rates are going to shoot up, the overall demand for housing properties may face turbulence, Ramani Sastri, chairman & MD, Sterling Developers says.

“The recent consecutive repo rate hikes had already added to buyers’ overall acquisition cost. With gradually increasing loan rates, homebuyers’ apprehension could set in quickly and they might adopt the wait-and-watch sentiment,” said Sastri.

Given that the central bank has retained its stance on withdrawal of accommodation, further rate hikes are not ruled out and this could further impact affordability, since low interest rates had actually spurred demand for real estate after the pandemic.

Higher rates would impact the affordable home segment more as they would hit first-time home buyers. “The impact of rate hike will be predominantly on the affordable housing side, which is primarily driven by sentiments and especially first-time home buyers who are heavily reliant on home loans,” said Lincoln Bennet Rodrigues, chairman and founder, The Bennet and Bernard Company.

However, the disposable income of homebuyers has been much better in recent years, which has led to better lifestyles and changes in the preferences of people. The current year has seen a higher number of jobs being added, primarily driven by the IT sector, which added nearly 3 lakh jobs in 2022. This could improve affordability of the middle class segment.

“The perception of lifestyle has changed which is driving the demand for premium properties. While the recent hikes in key policy rates by the RBI to control the high rate of inflation have resulted in a moderate hike in loan rates, the affordability of the home loan is still very good,” said Rodrigues. But this may be a minority view, as higher costs tend to impact demand.

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