Affordable housing demand to remain low as home loan rates rise: Experts

Some believe the impact of the interest rate hike has been limited and would not dampen homebuyers' spirit much, as demand remains high

With the hike in repo rates, the affordable housing segment, which was already reeling under inflationary pressure, is set to face another challenge as interest on home loans will rise and homebuyers might face affordability issues, say industry experts.

The Central bank hiked the repo rate for the sixth time in a row, by 25 bps to 6.5 per cent on Wednesday. This hike will translate into higher equated monthly instalments (EMIs) on new home loans. With the cost of funding rising continuously, most banks and housing finance companies are expected to increase home loan rates.

For existing borrowers, the tenure will increase and will result in a higher interest burden. But if the limit on the tenure gets breached, the number of EMIs they pay could also rise. Loans are usually available up to the retirement age of the salaried, and up to 65 years for the self-employed.

“The hike is not going to augur well for overall real estate activities, particularly the residential sector. The continuous rise in home loan interest rate is now expected to impact actual sales moving beyond sentiment disruption,” says Samantak Das, chief economist and head of research and REIS, India, JLL.

Since last May, the RBI has increased the short-term lending rate by 250 basis points to contain inflation. For financial year 2023, RBI’s first rate hike was 40 bps in May, followed by three consecutive rate hikes of 50 bps each between June and October, and then some softening to 35 bps in December. The benchmark lending rate has now reached a two-year high following the latest hike.

Experts say the recent hike might breach the 9.5 per cent mark, and that affordable and mid-premium segments might feel the pressure on sales volumes.

“The impact of home loan interest rate hike will be a major deterrent in the affordable housing segment as it will impact price-sensitive homebuyers and saturate the supply of the developers. Also, the luxury and mid housing segment players will remain cautious with a bit longer sales cycle,” says Niranjan Hiranandani, National Vice Chairman, Naredco.

The hikes need to be warranted before they turn negative for the ascending Indian economic growth curve, he added.

Pritam Chivukula, Treasurer, Credai MCHI, says a rate cut would have been a big booster for the real estate sector, which was overlooked in the recent budget.

“We hope the state (Maharashtra) government will step-in again to lighten the homebuyer’s load by reducing stamp duty,”  Chivukula says.

However, some experts believe the impact of the interest rate hike on the housing sector has been limited and would not dampen homebuyers' spirit much, as demand remains high.

“Demand for home loans has remained strong during the past year, as seen in 16 per cent growth in December 2022. We hope this rate hike will not adversely impact consumer sentiments towards home purchases in the coming financial year,” says Shishir Baijal, chairman & managing director, Knight Frank India.

Pradeep Aggarwal, chairman, Signature Global (India) also feels residential sales would increase by least 20 per cent in this quarter and by at least 30 per cent on a year-on-year basis.

Considering the growth focused fiscal  budget combined with the positive market sentiments, it is quite evident that the affordable and mid segment housing is going to witness a significant upsurge in demand in the coming months, Aggarwal adds.

Rohit Gera, MD of  Gera Developments feels that the impact of rate hikes however has been blunted because the cost of homes has not risen as much as salaries have over the last 5 to 7 years and this has led to an overall increase in affordability.