How rising mortgage rates will affect the housing market

The recent hike in mortgage interest rates by banks and housing finance companies – following an off-cycle repo rate hike by the RBI in May – came at a time when the real estate sector has just started to gain momentum after a few years. .

From SBI to HDFC Ltd and PNB to LIC Housing Finance, almost all banks and HFCs have revised their lending rates upwards in recent weeks, which certainly does not seem like a good move for the housing sector as this will have ultimately an impact on the whole. acquisition cost for homebuyers and may dampen residential sales to some extent.

According to industry experts, a 1% rise in the interest rate on home loans reduces the affordability of buying a home by 7.4%.

“At a time when the real estate sector was just beginning to recover, the rise in mortgage interest rates, even negligible, would constitute a psychological barrier for buyers. Coupled with rising input costs which to some extent had forced developers to raise property prices, this would act as a damper on the minds of the buyer, especially those looking for homes. in the affordable segment,” says Sanjay Sharma, Director, SKA Group.

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For the real estate sector struggling with sluggish sales in recent years, the apprehension is great.

“The increase in interest rates by the banks could not have come at a worse time. As buyers shake off the negative spirit of the pandemic and seek to take advantage of historically low housing costs as well as historically low interest rates on home loans, the banks’ decision would certainly have an impact on the sentiments of buyers. In addition, it will affect the real estate sector which had started to accelerate after a gap of two to three years and which, among other things, is one of the biggest job generators. Importantly, it also signals that the days of low interest rates on home loans are over,” says Nayan Raheja, Raheja Developers.

Dharmesh Shah, CEO of Hero Realty, says, “The rate increase came at the wrong time. However, it also significantly signals a sense of stability, as the end of low interest rates will draw attention to serious buyers.

Some real estate developers are also of the opinion that this series of interest increases could have been postponed for a while.

“Interest rate hikes by banks, especially after the RBI raised policy rates, were inevitable. However, I wish the banks had waited a few more months for this round of hikes. At least he could have waited for the real estate sector to pass on to customers the benefits of lower fuel prices and lower iron prices (through higher export duties). This decision will also affect the development of the commercial and retail segments,” said Sachin Gawri, CEO and Founder of Rise Infraventures Limited.

A few developers said that the current round of bulls might make buyers nervous and they might as well adopt a wait and watch attitude for a while.

“The current rise in mortgage interest rates by banks will surely signal to homebuyers that interest rates will only go north again. Contrary to popular perception that such an increase only affects the affordable housing segment, the move I believe will also have a big impact on the big-ticket luxury segment which involves high volumes of money hence higher EMIs and higher amount of interest. Furthermore, given that one of the banks increased its RPLR three times in one month, this move will also add uncertainty regarding the quantum of increases in the future,” says Deepak Kapoor, Director of Gulshan Homz.