Rising interest on home loans has started to impact homebuyer affordability

Repeated hikes in prime rates and inflation in key commodity prices have started to put an additional burden on homebuyers, reducing their affordability and raising fears of a drop in demand for residential housing.

Data from global real estate consultants Knight Frank shows that, as interest rates on home loans rise steadily, homebuyers are now experiencing significantly higher EMIs (equivalent monthly payments) than last year. This has resulted in reduced affordability among homebuyers.

According to its analyses, the affordability of homebuyers in cities like Mumbai, Hyderabad and Delhi-NCR is once again approaching pre-pandemic levels. In Mumbai’s largest residential property market, the ratio of average EMIs to income levels rose to 57% at the end of September, from 53% in 2020 and 2021. In the second-largest property market, the capital region National Delhi, this ratio has increased to 30%, compared to 26% in 2020 and 28% in 2021.

In Bengaluru’s third-largest market, the jump was similar – by four percentage points – from 24% in 2020 to 28% now. However, affordability in key markets remains below pre-COVID-19 levels in 2019.

Graphic: Pragati Srivastava

Notably, this increase is solely due to interest rate hikes on home loans by various banks and NBFCs (non-baking finance companies) through September. The recent hike announced by the Reserve Bank of India to the tune of 50 basis points has not yet been fully passed on by the banks, which will further increase the EMIs of home loans.

Additionally, the rising cost of building materials like steel, cement, aluminum and copper has led real estate agents to raise their property prices by 5-10%.

According to Shishir Baijal, Chairman and Managing Director of Knight Frank India, housing affordability, due to rising median lending rates, has deteriorated in 2022. “Affordability has deteriorated by 2 percentage points in cities since the rate cycle changed. The cumulative 0.95% increase in the median home loan rate will impact buyers’ affordability and therefore their buying decisions,” he said.

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