 "real estate")
Rising interest rates, higher inflation and increasing cost of construction are likely to slow down growth of affordable housing finance companies in the current fiscal, a report said on Thursday.
Affordable housing finance (ticket size below Rs 25 lakh) has proven to be one of the most resilient sectors to economic cycles and seen rapid progress over the past decade, India Ratings and Research said in a report.
With 25 per cent compound annual growth rate, the affordable housing sector has outpaced the overall housing finance sector growth in the past five years.
However, some tailwinds that had supported the sector earlier seem to be moderating and thus could slow down the pace of sector loan growth, it said.
"Rising interest rates, reduced cash flow of borrowers on account of the high inflation rate, increasing cost of construction, leading to both a rise in property costs and slowdown in new inventory launches, and halting of the government's Credit-linked Subsidy Scheme (CLSS) are some of the challenges facing this segment," the agency said.
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The interest rate scenario has turned around and most recently, the Reserve Bank of India (RBI) has increased the repo rates by 90 basis points (bps), leaving the repo rate just 25 bps lower than the pre-Covid levels.
The agency said a 100 bps increase in the interest rates leads to the borrowers' home loan EMI rising 6.1-6.4 per cent y-o-y in general, while for an affordable housing borrower, the loan EMI rises by about 5.3 per cent.
If the interest rate cycle continues to move up, a 200 bps increase could increase EMI in the range of 10.8-13 per cent, it said.
"While for existing borrowers, lenders can cushion the impact of increase in interest rates by a tenor extension in the first instance. However, for new customers, the EMIs increase would be upfront, thus impacting their home buying sentiments negatively in the medium term," it said.
The report said the construction costs for the housing sector have increased sharply with a steep increase in the prices of various raw materials, including cement, steel and concrete along with higher labour costs.
This has resulted in an increase of 20-25 per cent across key markets over a base construction cost of Rs 2,000-2,500 per square feet, as was seen in 2019, leading to margin pressure for developers, it said.
While developers have not been able to pass on the complete cost increase, there remains a near- to medium-term upward pressure on real estate prices for buyers.
"The high inflationary environment, coupled with high interest rates, is likely to affect loan affordability for new home buyers, which could lead to a slowdown in Asset Under Management (AUM) growth for home financiers due to a moderation in disbursements," the agency said.
The agency further said it expects the housing finance sector to grow at 13 per cent y-o-y in FY23, with affordable housing finance witnessing a growth of 16-18 per cent.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
