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Real estate players fear slowdown in sector during festive season on higher loan interest rates

Real estate sector fears slowdown due to rate hikes

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With the RBI pushing the repo rate at which it lends to commercial banks by another 50 bps, real estate players have turned apprehensive that the central bank move will cause short-term disruption and slowdown in the sector, and the ripple effect could be seen in the upcoming festive season.

Over the last three months, the apex bank has increased the repo rate by 1.40 percentage points, taking it to 5.40 percent which is well above the pre-pandemic level of 5.15 percent. Banks too followed the RBI rate hikes and adjusted their loan rates accordingly. Now, with this hike, consumers will be hit further as their loan interest rates were already raised quite a few times in recent months.

Real estate players are of the view that subsequent transmission of rates by banks is likely to start slowing the pace of growth in residential real estate.

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Following the surprise hike in repo rate in May, the home loan rates have already moved up from their all-time lows that have been helping key property markets surpass pre-Covid levels and witness record sales, according to an ET report. With hardening interest rates, realtors will now have to provide offers to stimulate and maintain the momentum of demand.

“As the home loan borrowing is at the flexible rate, short term interest rate spike will certainly hurt the homebuyers’ sentiments, but it averages out the cost positively in the long term. Developers are conscious about the inflationary pressure building up with the spiralling economic discord and will chalk out deal sweeteners on the back of festive tailwinds,” Niranjan Hiranandani, National Vice Chairman, NAREDCO, said.

For consumers who were paying an interest rate of 6.7 percent before May – the month when RBI hiked rate by 40 bps, some banks have already raised this rate to 7.8 percent. With this third upward revision in repo rate by the RBI, banks are expected to hike rates further in coming days.

“Likely transmission of another 30-40 basis points increase in home loan rates may cause some mid-cycle slowdown for the residential sector and likely result in some ripple effect on the upcoming festive season. This could see some short-term disruption to the sales growth momentum,” said Samantak Das, chief economist, and head of research and REIS, India, JLL. “It is however a note of caution and not a reflection on the overall residential sector’s health, with the medium to long-term growth prospects remaining intact.”

India’s residential sector is in the middle of a prolonged and sustained growth cycle much similar to the 2010-2012 period, but more driven by real market fundamentals in terms of homebuyer demand, according to ET report. In fact, sales in the first half of 2022 (January-June) were the highest in over a decade on a same-period comparison and second only to the first half of 2010.

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