High interest rates do not deter home buyers, says BoB research report

High interest rates does not impact the demand for housing as individual home buyers are aware that it may move up and down during the tenure of their loan, said a research report by Bank of Baroda.

The borrowing rates are on the rise since May this year after the Reserve Bank of India (RBI) effected first hike in the benchmark lending rate. The repo rate has increased by 140 basis points since May.

The report on 'Housing loan scenario in India' said the housing segment has shown resilience post pandemic.

The strong momentum in housing loans by both Public Sector Banks (PSBs) and other financial institutions also points to the same. The government and RBI measure to support this sector, along with lower prices and interest rates helped cushion the impact of the Covid-19 pandemic on this sector.

With normalisation of economic activity and a pickup in growth, demand for housing is poised to grow, suggesting more demand for housing loans, said the report authored by Aditi Gupta, Economist at Bank of Baroda.

"On the other side, higher interest rates may deter some borrowers from the housing market, the demand for housing as a safe investment is likely to offset this.

"Besides individual home buyers will be prepared for interest rates to move up and down during the tenure of their loan and hence may not be deterred from such purchases," it said.

It further said the growing importance of home loans can be gauged from the fact that the ratio of outstanding individual home loans by commercial banks and Housing Finance Companies (HFCs) in India's GDP has grown substantially in the last ten years.

From about 6.8 per cent of GDP in 2010-11, this ratio has risen to 9.5 per cent in 2020-21.

Even in 2019-20, despite the adverse Covid-19 shock which badly affected the housing sector, ratio of housing loans rose to 9.8 per cent, it said, adding that in the succeeding year, the sector noted a remarkable recovery from the pandemic and the ratio of housing loans in GDP rose to 11.2 per cent.

From Rs 3.45 lakh crores in fiscal 2010-11, the housing loan portfolio of banks has increased to Rs 15 lakh crore in 2020-21, registering annual growth of 14.3 per cent.

PSBs are the dominant market player in the housing loan segment accounting for 61.2 per cent of the total housing loan portfolio of commercial banks in financial year 2020-21.

However, it must be noted that the share of PSBs has seen a sequential dip in share from about 70 per cent in 2010-11, it said. From 21.3 per cent in 2010-11, the market share of private banks increased to 35.2 per cent in 2020-21.

The report also said from Rs 2.6 lakh crore, the housing loan portfolio of HFCs rose to Rs 6.6 lakh crore in 2018-19 and remained stagnant at the same level in the following year.

In fiscal 2020-21, outstanding home loans by HFCs rose moderately to Rs 7.1 lakh crore as housing demand remained muted to the Covid-19 pandemic.