“The sixth straight increase in the repo rate comes on the back of rising property prices which may add to the pressure on sales volumes, say analysts”.
The Reserve Bank of India (RBI) on February 8 hiked its policy rate by 25 basis points to 6.5 percent. While this is along expected lines, there could be some repercussions on housing uptake as the increased rate will add to the financial burden on homebuyers, especially those going in for affordable housing, as apart from home loan interest rates, property prices have also inched up in the recent past two to three quarter, say real estate experts.
This is the sixth time interest rate has been hiked by the RBI since May last year, taking the total quantum of hike to 250 basis points. Announcing the bi-monthly monetary policy, RBI Governor Shaktikanta Das said the monetary policy committee (MPC) by a majority decided to raise the policy repo rate by 25 basis points and keep a “strong vigil” on the inflation outlook.
Analysts explained why this will affect the real estate market.
“We may see some pressure on sales volumes in the affordable and lower mid-range housing segments, which are more cost-conscious. The affordable segment has already been in the doldrums, and adding further to the cost of acquisition obviously does not help,” said Anuj Puri, chairman, ANAROCK Group, a leading property consultancy.
Experts said that the interest rates on housing loans may breach the 9.5 percent mark with today’s hike and that may put some pressure on sales volumes in the affordable and lower mid-range housing segments, which are more price-sensitive.
According to data shared by ANAROCK, the minimum rate offered by State Bank of India (regular term home loan rates) is 8.9 percent and maximum is 9.40 percent. HDFC offers standard home loan rates at 8.95 percent (minimum) and 9.85 percent (maximum). ICICI Bank offers standard home loan rates at 9 percent (minimum) and 9.80 percent (maximum), the data showed.
According to Prashant Thakur, senior director and head, research, at ANAROCK, most banks offer home loans at relatively higher interest rates to people with either low CIBIL (credit-worthiness) scores or those borrowing lower amounts. Since several borrowers seeking affordable and mid-segment homes have low CIBIL scores and are borrowing lower amounts, the rates charged by banks are higher. Depending on these two factors, the new rate hike will take the interest rates beyond the 9.5 percent mark for these borrowers, he said.
Pradeep Aggarwal, founder and chairman, Signature Global (India) Ltd, a developer of affordable housing, however, justified the RBI’s hike. “It is an accommodative move as per current micro and macroeconomic conditions globally as well as domestic markets. Controlling inflation is the RBI’s mandate, and the apex bank is showing prudence in taking corrective measures to curb rising inflation,” he said.
This is how the numbers stack up
The repo rate is directly linked to loan rates offered by lenders so an increase in the repo rate will increase the borrowing cost. The rate hike will make EMIs expensive by approximately 2-4 percent. Borrowers will either have to shell out extra money to repay their loans or will have to extend the loan tenure, said V Swaminathan, executive chairman, Andromeda Sales, a loan distribution company, and Apnapaisa.com.
To cite an example, the EMI for a 20-year home loan of Rs 70 lakh at 9.25 percent was Rs 64,111. But when we factor in the 25 bps hike, the interest rate becomes 9.50 percent, thereby increasing the EMI to Rs 65,249, or an extra amount of Rs 1,138 each month.
In the last three quarters, the repo rate has been increased by 250 basis points. So the EMI for a 20-year home loan taken in May 2022 of Rs 70 lakh at 7 percent was Rs 54,271. But when we factor in the 250 bps increase since May, the interest rate becomes 9.50 percent, taking the EMI to Rs 65,249, or an extra Rs 10, 978.
Samantak Das, chief economist and head of research and real estate intelligence service, India, at real estate services company JLL, said that the cumulative increase in the policy rate has had a similar effect on mortgage rates. This is not going to augur well for overall real estate activities, particularly the residential sector, he said. Sales of residential units across the top seven cities in 2022 increased by 68 percent year-on-year, a high figure that gains significance keeping in mind the rise in mortgage rates, property prices and global headwinds during the year.
“However, the continuous rise in home loan interest rate is now expected to impact actual sales moving beyond sentiment disruption of homebuyers. Going forward, we expect the economy to stand steady along with softening of global headwinds so that the RBI can eventually reduce the policy rate, creating positive ripples,” he added.