The Real Estate industry awaits RBI's monetary policy decision on the repo rate and its impact on Home Buyers Across Segments



Mumbai, Team Estrade, 8 August 2023: High inflation has affected commodity prices globally. In this scenario, the Housing sector can’t be immune to these events.

In the US, the housing prices have hit an all time high in the major cities, along with this a rise in US 30 year mortgage has made it difficult for home buyers to afford a mortgage. According to Freddie Mac, the average mortgage rates as of 3rd August 2023 stood at 6.9% for the 30 year fixed rate mortgage and 6.25% for the 15 year fixed rate mortgage. Over the course of last one year, this is a more than 190 BP change in both these fixed rate mortgages. US cities are already suffering from high homeless population, and these numbers paint even a more bleak picture.

In other Anglo-Saxon countries – UK, Canada and Australia, the high inflation and commodities prices have affected all sectors.

In the UK, the Bank of England has consistently increased rates to tackle global inflation. The bank has increased rates since December 2021, to 5.25% in June 2023. Their target is to keep inflation at 2%. Only future will tell the success of these steps by their Central Bank.

Canada is not left far behind for tackling global inflation by way of rate increase by their Central Bank – Bank of Canada (Banque Du Canada)After keeping rates unchanged for the months of March and April 2023, the bank has increased the policy rates by 50 BPs to 5% in July 2023 – highest over the last 15 years.

In Australia, even though the RBA – Royal Bank of Australia, has kept the cash rate (over night money market interest rate) unchanged over the last 2 months at 4.1%, the rate has changed by 400 BP since May 2022. This has adversely affected the pockets of existing home owners, who have had to pay more for their existing flexible rate (Floating rate) mortgages.

The Real Estate markets of India, eagerly await Reserve Bank of India‘s decision on their key policy rates. Unlike the western economies, the Indian markets have always experienced high inflation in commodities and fuel prices. Rather than consistently complain, the country has adapted to this market situation. Indian Real Estate Developers have consistently created value for home buyers – the most valuable stake holder of this industry.

According to Akash Pharande, Managing DirectorPharande Spaces, “The sector can be divided into three segments – Affordable Homes, Mid-range Homes and Luxury Homes segments. In the Affordable Homes segment – High interest rates have a substantial impact on this segment as they directly affect the EMI payments these buyers must shell out. As a result, they may either delay their home purchase decisions or opt for even smaller-sized homes in the already compact housing segment to manage the financial obligations.”

Adding further, he said, “Mid range Homes segment – Higher interest rates have a bigger impact on costlier homes, and mid-range home buyers may have to adjust their budgets or compromise on certain features, size, and location preferences to accommodate the increased cost of borrowing. Luxury Homes segment – Luxury home buyers can also afford higher down payments, reducing their loan-to-value ratios. This mitigates the impact of increased borrowing costs to some extent. High interest rates can still indirectly affect the luxury segment.”

While speaking to Team Estrade, on the impact of high interest rates on home loans, Rakesh Reddy, Director, Aparna Constructions, added,  “Rising home loan rates have negative implications for the recipients of affordable housing initiatives as they increase overall costs of the project. Since affordable housing is viewed as a driving force of the Indian economy, stable interest rates would incentivise the real estate sector to focus more on affordable housing projects. The notable surge in demand for affordable housing can be attributed, in part, to the historically low interest rates. Moreover, the affordable housing sector has received significant encouragement for both developers and homeowners in the form of infrastructure status in the 2017-18 Union Budget and a reduced GST rate of 1% for such projects. The availability of affordable financing and accommodative policies played a pivotal role in driving strong growth in sales and launches of affordable housing. However, the recent rate hikes have effectively eliminated this incentive. As a result, developers are likely to experience an increase in borrowing costs which could adversely affect the market as potential buyers may perceive this as a reason to delay their purchasing decisions.”

Citing past data, Rakesh said, “The increase in home loan rates experienced some relief courtesy of the RBI’s 2022 resolution to expand the individual housing loan ceiling for cooperative banks by 100%. This strategic maneuver is anticipated to generate a boost in demand within the affordable housing sector, as a wider array of credit facilities will be accessible to the lower and middle-income groups. This development is also a confirmation of the pivotal role played by cooperative banks in fostering inclusive growth throughout India. The importance of affordable housing cannot be overstated, as it caters to the largest demographic segment in India. Such housing options not only stimulate interest among potential buyers but also broaden the scope of the market. The increased migration to urban centers emphasises the pivotal role of affordable housing in the development of tier 2 and tier 3 cities, thereby fuelling local economies.”

In conclusion, whatever may be the policy change announcement by the RBI, the Indian economy, and especially the Indian Real Estate sector has remained resilient even in difficult global monetary policy trends. While the western economies are waking up the effects of inflation – rude awakening! The Indian economy has consistently taken this phenomenon in its stride and adapted accordingly. While western economies are shrinking and losing their steam, Indian economy is showing growth and promises of a better future.


Read More Articles on Estrade Real Estate

The Real Estate industry awaits RBI’s monetary policy decision on the repo rate and its impact on Home Buyers Across Segments