Repo rate: RBI repo rate hike could slow housing demand recovery momentum

The Reserve Bank of India’s decision to raise the repo rate by 40 basis points in a bid to contain inflation which has soared due to the global geopolitical scenario and its impact on the Indian economy is expected to slow dynamics of housing demand. However, this may not affect the recovery in home sales significantly, at least for now.

The central bank raised the repo rate after nearly two years, with the rate remaining unchanged at 4% since May 2020.

The cost of construction, which has already increased for the past few months due to the Russian-Ukrainian war and now the cost of financing for buyers and developers, is expected to have an impact on the residential real estate sector, said industry experts and observers.

“From a real estate perspective, this key rate hike is not welcome and will have a negative impact as mortgage rates will rise immediately. After a five-year hiatus, we have seen a resurgence in sales homes and launches in the last two quarters due to the ‘synergy of affordability’,” said Samantak Das, Chief Economist and Head of Research and REIS, India, JLL.

According to Das, this rise in repo rates coupled with cost inflation in construction should slow the growth trajectory of the residential sector, which does not bode well for the Indian real estate sector.

After two years of unchanged repo rates, the RBI’s decision to raise the interest rate by 40 basis points in one fell swoop to 4.40% suddenly surprised many in the real estate sector at a meeting of off-cycle monetary policy.

“In line with the housing pullback stance, the sharp acceleration in rates will affect homebuyers with mortgage installment concerns. State governments such as Maharashtra which are the biggest beneficiary of housing demand are expected to come forward to support homebuyers by reducing the stamp duty rate to 3%,” said Pritam Chivukula – Co-Founder and Director, Tridhaatu Realty and Treasurer, CREDAI MCHI.

Home sales across India hit a new high in January-March for the second consecutive quarter, since the second quarter of 2013, as Bangalore recorded the highest quarterly sales on record and the Greater Mumbai (MMR) saw its sales stand at an 11-year high during this period.

Real estate developers believe that the rise in rates will have an impact on the growth of residential sales, but in the short term.

“We believe this rate hike is short-term and that going forward, home sales will continue to grow. Buying a home is considered the biggest decision of a lifetime and these decisions at short term are unlikely to impact a buyer’s decision. Builders are always offering attractive programs and in a few months we will be in the middle of the holiday season which will bring buyers back,” said Rajan Bandelkar, president of NAREDCO.

Although rising rates are seen as a factor likely to dampen the recovery in demand seen over the past six quarters, few industry experts and players also expect the sales momentum continues.

“The rise in the repo rate may increase the cost of acquisition for homebuyers, provided that lenders also increase home loan rates in tandem with the repo rate. However, the impact would be marginal on residential sales given strong end-user demand for homes backed by increased hiring and wages seen of late,” said Aparna Chaughule, Associate Director, India Ratings and Research, who expects overall residential sales increase by 12% in 2022-23.

Residential sales in the seven major cities saw an 11% year-on-year increase to more than 58,840 units in the first quarter of 2022, according to data from JLL India. The recovery in demand for housing, fueled by a combination of factors including historically low interest rates and the pandemic-induced awareness of the need for homeownership, is helping to attract liquidity from these institutional investors.

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