The segment that will feel the pain the most is the affordable housing segment – the rate hike is expected to hit the majority of the buyers.
Keeping in view the current two decade low home loan interest rates and subdued housing prices, people who have been planning to buy a new house are in for an unpleasant surprise as things have changed dramatically over the last few weeks. On one hand, home prices have started moving up to some extent due to high inflation while on the other hand interest rates have risen sharply. While many experts feel that the situation is getting worse for new home buyers, however, there are also other experts who feel that all is not lost. Here’s how the current developments are likely to impact new homebuyers.
Most of the raw materials used in construction such as steel and cement have seen a sharp rise in price over the past few months, due to which home prices have increased. Higher interest rates will make matters worse. Shishir Baijal, Chairman & Managing Director, Knight Frank India says “Rising interest rate along with elevated property construction cost and product price pressures could adversely impact on the real estate buyer’s sentiment.”
Ramani Sastri – Chairman & MD, Sterling Developers, concurs: “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 and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic.”
Affordable home buyers to be the worst affected
The segment that will feel the pain the most is the affordable housing segment – the rate hike is expected to hit the majority of the buyers. Anuj Puri, Chairman – ANAROCK says “The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month. Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12% and above. Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments.”
No respite visible in near future
There is no respite visible in the near future as stubborn inflation numbers are likely to take a while before it comes down to RBI’s comfort zone. “As the inflation is expected to remain above RBI’s upper range tolerance level of 6% till Dec this year; it will certainly have some repercussions on housing uptake,” says Ram Raheja, Director, S Raheja Realty.
There will be no relief for home buyers unless there is a durable sign of the end of hyperinflation and the Russia-Ukraine war. “Further, monetary policy tightening by central banks globally and any resolution on the prolonged Russia – Ukraine war will bring price stability,” says Baijal.
The silver lining for new home buyers
There are many experts who believe that these rate hikes are in the larger interest of the economy and will ultimately help all homebuyers. “Although the recent step will increase the home loan rates, an unstable economy is not conducive to the overall health of the real estate industry. For the industry to operate optimally, it is important that the economy continues to grow in a stable, inclusive, and steady fashion,” says Atul Goel, MD, Goel Ganga Group.
“The rise in policy rate is expected to act more as a sentiment disruptor for the home buyers given that mortgage rates are likely to inch up. However, the impact of the rate hike on home loan EMIs is unlikely to be significant as these loans are for a longer tenure. Banks and Housing finance companies have only partially transmitted the previous policy rate hike. Also, interest rates are still likely to remain at decadal lows and hence, while the opportunity for homebuyers is reducing, it is critical to understand that affordability remains high and buying momentum is expected to remain largely intact,” says Samantak Das, Chief Economist, and Head Research and REIS, India, JLL
The current scenario has taught borrowers about dealing with a long term loan like a home loan where the interest rate is bound to move up and down during this period. “There has been a fundamental change in buyers’ expectations and attitude towards homeownership and this will largely withstand marginal fluctuations in lending rates,” says Sastri.