In a surprise move, the Reserve Bank of India today hiked the repo rate by 40 bps to 4.4% for the first time in almost two years. This comes at a time when inflation has been rising to an 18-month high amidst a rebound in domestic economic activity.
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Commenting on the RBI move, industry experts said with inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the RBI took a tough unscheduled decision in an off-cycle monetary policy meet.
“However, this was expected, as inflation has definitely moved into the threatening zone. Unfortunately, for home buyers, this hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began,” Anuj Puri, Chairman – ANAROCK Group.
Moreover, rising interest rates and inflationary trends in basic raw materials in construction, including cement, steel, labour cost etc., will add to the burden of the residential sector, which did significantly well in the previous quarter – Q1 2022.
“This rise in interest rates will ultimately impact overall acquisition cost for homebuyers – and may dampen residential sales to some extent. The possibility of overall price hike was also highlighted in ANAROCK’s recent consumer survey wherein at least 56% of the respondents felt that property prices will increase in 2022. A deep dive revealed that a price rise of >10% will have a ‘high impact’ on residential sales and <10% rise will have a ‘moderate-to-low impact’ on sales. The current sales velocity will thus be impacted by rise of >10% in overall acquisition costs,” added Puri.
Dr. Samantak Das, Chief Economist, and Head Research and REIS, India, JLL, said that from a real estate point of view, this hike in policy rate is not welcome and will have a negative impact as home loan rates will increase immediately. “After a hiatus of five years, we have observed a robust comeback in residential sales and launches in the last couple of quarters due to ‘affordability synergy’. However, this repo rate hike coupled with cost-push inflation in construction is likely to slow down the growth trajectory of the residential sector, which does not augur well for the Indian real estate sector.”
The rate hike, in fact, signals an end to the historical-low interest rates regime, as lending institutions will soon follow with increase in rates on deposits and loans.
“With the repo rate hike, floating rate loans will get costlier. All new loans are likely to be priced higher. This will lead to higher interest outgo and EMIs. For example, on a home loan of Rs 50 lakh for 20 years at 7%, the EMI is Rs 38,765 and the interest is Rs 43.03 lakh. If the rate increases to 7.4%, the EMI becomes Rs 39,974 and the interest Rs 45.93 lakh. Your EMI is set and it may not increase, but the number of EMIs you pay may increase. To tackle this hike, you could refinance to a lower rate, increase your EMIs, and make pre-payments regularly,” suggested Adhil Shetty, CEO, Bankbazaar.
Some industry experts, however, believe that there will only be a limited hike in the home loan interest rates, at least in the near future.
“We don’t believe though, home loan rates will increase by more than half to one percent this year. These are still fairly low interest rates and home buyers should make use of it. Real estate as an asset class is always a preferred investment to park savings in during inflationary times. Incentives like relief in the stamp duty and registration fee can help the positive impetus in the real estate sector to continue. State governments should consider taking such steps,” said Amit Goyal, CEO, India Sotheby’s International Realty.
Some consultants also said that from a real estate perspective, they don’t expect an immediate increase in home loan rates by commercial banks, which may also be a good time homebuyers sitting on the fence.
“From a real estate perspective, we don’t expect an immediate increase in home loan rates by commercial banks. This makes it a good time for homebuyers who were on the fence about buying their dream home. With home prices expected to rise in certain segments, it is an opportune time for homebuyers to take advantage of the current low home loan rates and largely stable prices before banks reset interest rates,” said Ramesh Nair, CEO, India & Managing Director, Market Development, Asia at Colliers.