Realtors worried about likelihood of another repo rate hike by RBI

Borrowing costs for both developers and homebuyers will rise, leading to higher housing prices on the one hand, and diminished demand from buyers on the other

The Reserve Bank of India (RBI) is expected to hike the repo rate in its upcoming monetary policy committee review in order to fight rising inflation. This has become a pain point for the real estate sector due to its potential impact on housing sales and home loan rates.

The RBI's Monetary Policy Committee had last hiked the key repo rate to 6.5 per cent in February. In the past one year, the key rate has risen from 4 per cent to 6.5 per cent, which was absorbed by developers, say experts.

According to real estate body Credai, any further increase in the repo rate would lead to even higher borrowing costs for developers. This would ultimately lead to higher project costs and housing prices, at a time when prices have already risen by 5-6 per cent in the past one year.

“The retail home loan market comprising affordable housing, is bearing the brunt of an economic slowdown due to consecutive repo rate hikes. The steep hike of 250 bps in home loan interest rates has cautioned potential homebuyers to postpone their purchases. Parallelly existing customers are having a tough time trying to accommodate hike in EMI payouts,” said Niranjan Hiranandani, MD, Hiranandani Group.

Not just developers, homebuyers will also face higher, double-digit home loan rates which could deter them from purchasing a house. The calculated extension of home loan tenure is also unwarranted, making it financially unviable for many existing homebuyers.

Hiranandani said that banking and financial institutions should introduce new innovative flexi or step up EMI schemes to help onboard homebuyers in the high interest rate regime.

The residential market's winning streak continued in the first quarter of 2023 despite the hike in interest rates over the past year. India’s housing sector is witnessing possibly the biggest boom in the last decade, driven by various factors such as affordability, lifestyle upgradation and aspiration of customers to own homes and is expected to continue, say experts.

With the recent crude oil production cut by Opec and Russia, consumer inflation is unlikely to ebb soon. Inflation in the core categories (ex-food and fuel) has stayed persistently above 6 per cent for the past 22 months as well.

Despite a sharp rise in the repo rate which has immediately been transmitted to lending rates, housing demand has continued to sustain thus far. Outstanding home loans grew by 15 per cent in FY23 (Until February 2023), said Shishir Baijal, chairman & managing director, Knight Frank India.

However, any further rate hikes coupled with elevated prices could potentially dampen consumers' purchasing capacity, which in turn could curtail demand, Baijal added.

Fuelled by both end-user and investor interest, the real estate market has been resilient, with buyers carefully filtering out projects and looking for the right product mix in terms of affordability, accessibility and quality of living. Hence, in such a context, another repo rate hike by the RBI will not augur well for the real estate sector, said Ramani Sastri, chairman and MD, Sterling Developers.

However, according to Shiv Parekh, founder of hBits, this development will have a mixed impact on the real estate industry as it is likely to push home loan rates over 10 per cent and further add to the finance cost of existing and new home buyers. At the same time  if the rate hike comes into effect, it will limit inflation in construction and raw material costs, ultimately boosting the sector's bottom line.

In any case, the real estate industry has received a lift from pent-up demand and increasing incomes following the pandemic, Parekh added.