Home loan rates enter red zone — will dent affordable and mid segment sales the most

• RBI has hiked interest rates for the second consecutive month to 4.9% to fight surging inflation.
• The real estate sector, which was witnessing good pickup in sales due to the low cost of financing, could be impacted by RBI’s rate hike move.
• The increasing rate of interest will slowdown customer demand for home loans going ahead.

The 50 basis point interest rate hike by the Indian central bank was greatly anticipated. So much so that a few banks have started hiking their home loan rates ahead of it.

“Just last night I got a message from Axis Bank that they are increasing my home loan's rate of interest to 7.1%. Today, after the new hike in RBI's repo rate, I guess it will jump to 7.6%. This was expected but it is still difficult to wrap my mind around it,” said Karuna Sharma, a Mumbai resident who took out a home loan at 6.7% last year.

It’s not just those paying the EMI, but real estate developers too are worried about the extent of rate hike — which will affect the economics of homebuyers. For them, a 50 basis point hike is a large debt.

“A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales.The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month,” said Anuj Puri, chairman at Anarock property consultants.

The segments that will be worst affected will be affordable and mid-segments, the consultant says. It will also affect the volumes at large and also reverse the trend of robust growth in real estate sales in the last two quarters. The number of residential launches have also grown up and that’s reflecting in higher sales — but it might soon go away.

However, this interest rate hike will dent homebuyer’s confidence.

“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,” said Ramani Sastri, chairman & MD at Sterling Developers.

Home sales also increased as several large companies asked their employees to return to work — which suffered a temporary setback due to the onset of the third wave of Covid-19, said a report by Kotak Institutional Equities.

Now that Covid cases are also inching up and interest rates are also high, the trend might take a turn for the bad.

The overall increase of about 1% in the cost of funds by the RBI over the last few months will impact the overall feasibility of large projects, infrastructure and long gestation projects.

This development comes at a time when the real estate sector is dealing with its own raw material inflation. Since loans would now get costlier, they would have limited space to increase prices.

“A rise in inflation can soften the stance on an otherwise robust real estate industry. Meanwhile, the government should also make concentrated efforts to reduce the spike in prices of raw materials such as cement, bricks, steel, etc. This will also give some relief to the sector,” said Suren Goyal, partner at RPS Group.


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