Rising mortgage rates won't hit housing sales in India, say experts

The increase in the repo rate and the subsequent rise in mortgage rates are unlikely to have a major impact on residential sales in the country, stock brokerages have said.

Higher mortgage rates will have a lower impact on the Indian housing market than in the US market, said Kotak Institutional Equities (KIE) in a report released on Tuesday.

“The Indian housing market may see some impact on sales, given the moderate increase in equated monthly instalments (EMIs) from higher mortgage rates and negligible defaults,” said KIE.

Domestic mortgage rates have increased by around 90 basis points - similar to the increase in the repo rate.

“We expect repo rates to peak at 5.75 per cent, with home loan rates peaking at around 8.5 per cent and EMIs increasing by 15 per cent versus 2021-22 (FY22) levels. We see two mitigating factors: 1) salaried individuals will get increment of 5-7 per cent, with domestic inflation averaging around 5-6 per cent, which will improve EMI/income ratio, and (2) a new homebuyer can increase the tenure of the loan, to keep EMIs stable,” it said.

KIE said the low base of the housing market might mitigate the impact of a possible slowdown in housing demand.

There has been some recovery over the past year, with aggregate sales in five major markets increasing 23 per cent over those in FY22. However, volumes are just about at the previous peak a decade ago, it said.

“The Indian housing market was quite weak over 2011-12 through 2018-19, with a volume compound annual growth rate of minus 4 per cent. As a result, new launches have been weak and inventories manageable. Meanwhile, the increase in average home prices has been significantly lower in India versus in the US,” it said.

Motilal Oswal Research, in a report released last week, said in a rising interest-rate environment, companies will see an impact once mortgage rates cross 8-8.5 per cent.

The sharp rise in mortgage rates and higher inflation can lead to a ‘marginal push-out’ in demand in the near term and also developers’ inability to raise prices further, it said.

It added that while rising interest rates were likely to have a sentimental impact on the sector in the near term - reinforced by higher construction costs and constrained industry growth - larger developers will consolidate their market share.

“A large part of the current demand remains end-user-driven. Thus, any increase in mortgage rates beyond 8 per cent will lead to demand push-out for a couple of quarters,” it said.

It said developers were coming up with strategies to mitigate this rise.

For instance, Lodha is offering two-year fixed-rate loans for its projects. By then, income growth will take care of any additional interest burden, it said.

Motilal Oswal Research said it continued to prefer Lodha and Oberoi Realty stocks, for which it had a ‘buy’ rating, over DLF and Godrej Properties, which it rated ‘neutral’.