Home loan rates go up If Real Estate Sector Hits
The real estate sector may be among the worst hit by the Reserve Bank of India’s persistent effort to contain inflation by increasing repo rate and making credit more and more expensive. RBI’s repo rate increase, announced on Thursday, may take the home loan interest rate to well over 11%, stretching the limits of affordability for the common man, industry observers said.
Interest rate for home loan have seen a steep rise in the last few quarters as most banks and housing finance institutions have passed on the impact of the apex bank’s repo rate increase to the customers, thereby making it difficult for home seekers to arrive at a decision to buy that dream abode. What is worse, finance sector analysts are expecting couple of more such rises in the coming quarters.
Ajit Madbhavi, an entrepreneur engaged in engineering business, who has been working on organising finances to buy a house, told TOI that his calculations are going awry for the last six months as home loan rates are going higher and higher. “With every percentage increase in the interest rate, my estimate about the repayment period changes,” he said, adding that he has finally decided to wait and watch the scene for some time.
Madbhavi is not alone. Many others have postponed their decisions to buy properties. According to Anuj Puri, chairman and country head at the real estate consultancy Jones Lang LaSalle India, “Purchasing activity had already dropped visibly during the last tranche of interest rate hikes. We will see a further drop in buyer interest now.”
Anil Kothuri, head, retail finance, Edelweiss Group, said the latest increase of 25 bps in policy is along expected lines. “This hike will be mirrored by an increase in lending rates for new and existing home loan borrowers. Home buyers will be forced to re-evaluate their plans since they will get 25% lower loan amounts as compared to a year ago, owing to rising interest rates.”
Alternatively, the repayment period of the loan will extend to longer duration.
Financial advisory company KPMG’s head of financial services practice, Abizer Diwanji, said there will certainly be an impact on demand for homes due to the interest rate rise. Steady rise in lending rate will push the loan tenors and make it difficult for a home buyer to project his long-term commitment, he said.
The possible slowdown of demand is however unlikely to stabilise the prices, as developers are already struggling to cope with the rising input cost, mainly in the steel and cement. “The project finance channel for developers, available from banks, is fully exhausted and they are resorting to structured borrowings, paying interest of 16-18%,” Diwanji pointed out.
Puri said a lot depends on the financial ability of individual developers to hold on to their current pricing and risk losing sales till the situation improves. “Developers with enough capital bases are less likely to relent on their pricing than smaller developers with an urgent need to sell their stock.”
Satish Magar, president, Credai, Pune said the rate rise may hit the middle income groups more. He however said the affordability index for a sizeable chunk of prospective home buyers is rising and they won’t be deterred from making their decisions. “The rate rise implemented so far will not significantly impact this section of buyers as it will be spread over their repayment periods,” Magar said, adding that it will be some time before any estimate on slide in demand for homes is made.
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