Knight Frank India study shows, although the interest rate this far has not had a significant impact on sales, with the deterioration of affordability, this could become a factor soon.

The Reserve Bank of India’s (RBI’s) fourth successive hike of the repo rate last week by 50 basis points (bps) may defer prospective homebuyers to invest immediately in property and opt for rental accommodation over the next few quarters.

As expected, the central bank hiked repo rates on Friday in an effort to contain inflation and provide support to the currency. With this hike, the rates have gone up by 190 bps, cumulatively, in the last five months. This was followed by the two biggest mortgage lenders, Housing Development Finance Corporation and LIC Housing Finance revising interest rates upwards immediately.

Since the rate cycle changed in May the affordability has worsened by 2% across cities. Higher interest rates are expected to increase the equated monthly installments (EMIs) for homebuyers, further affecting housing affordability and slowing the pace of growth in residential real estate.

Amarendra Sahu, founder and CEO, NestAway Technologies was quoted as saying, “The home mortgage rates are now back to pre-Covid levels or even higher. This is likely to increase traction in the rental segment. A higher home acquisition cost and interest rates will make renting far more affordable. Also, homebuyers will likely wait for the current cycle to get over,”

Experts also believe two more hikes till March will push rates further above 9% and may adversely affect demand.

“The impact on residential sales can already be felt, but the long-term prospects remain positive. After Covid, there was a sudden boom in demand from investors and end-users driving the market. The market will stabilise and will be driven by the end users now,” said Sumanth Reddy, vice chairman of the National Association of Realtors, a body representing over 50,000 property brokers across the country.

Some property brokers are also seeing increasing demand from homebuyers who are rushing to close the transaction due to the constant increase in repo rate. “We have seen a 50% present rise in demand from prospective homebuyers as there is a fear of further rate hike,” said Bhavesh Kothari, founder of Property First, a luxury property broking firm.

The central bank will likely continue increasing the policy rate to narrow the gap with the consumer inflation index and reduce the extent of the negative real interest rate in the economy The recent hikes in housing loan rates have started pinching existing borrowers whose savings are crimped by rising inflation. Four rounds of increases in policy rates have raised housing loan rates to 8.4% from the decadal low of 6.6% just five months ago, impacting second home purchases too.

The real estate sector has been on a strong recovery path after surviving the worst of the pandemic. Annual residential sales in 2022 have surpassed pre-Covid levels, and recent monthly sales trends indicate strong momentum.

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