mortgage rates: The rise in rates should delay home ownership and opt for rental

The fourth consecutive hike in the Reserve Bank of India (RBI) repo rate last week by 50 basis points (bps) is expected to push some potential buyers to postpone their immediate property purchase plans and opt for rental accommodation in the over the next few quarters.

As expected, the central bank raised repo rates on Friday in an effort to contain inflation and support the currency. With this rise, rates have risen 190 basis points, cumulatively, over the past five months. This was followed by the two largest mortgage lenders, Housing Development Finance Corporation and LIC Housing Finance, which immediately revised interest rates upwards.

According to real estate consultant Knight Frank India, although the interest rate so far has not had a significant impact on sales, with deteriorating affordability it could soon become a factor. Affordability has deteriorated by 2% in all cities since the rate cycle changed in May. Higher interest rates are expected to raise monthly equivalent payments (EMI) for homebuyers, further affecting housing affordability and also slowing the pace of residential real estate growth, experts said.

“Home loan rates are now back to pre-Covid levels or even higher. This should increase traction in the rental segment. Higher acquisition cost and interest rates will make leasing much more affordable. Additionally, homebuyers will likely wait for the current cycle to end,” said Amarendra Sahu, Founder and CEO of NestAway Technologies.

Experts believe two more hikes through March will push rates above 9% and could depress demand.

The central bank will likely continue to raise the policy rate to narrow the gap with the consumer inflation index and reduce the extent of the negative real interest rate in the economy. “The impact on residential sales is already being felt, but the long-term outlook remains positive. After Covid, there was a sudden boom in demand from investors and end-users driving the market. The market will stabilize and will now be driven by end users,” said Sumanth Reddy, vice president of the National Association of Realtors, an organization representing more than 50,000 realtors across the country.

Some real estate brokers are also seeing an increasing demand from home buyers rushing to close the deal due to the ever-increasing repo rate. “We have seen a current 50% increase in demand from potential buyers as there are fears of further rate hikes,” said Bhavesh Kothari, founder of Property First, a luxury real estate brokerage firm.

Recent increases in home loan rates have begun to pinch existing borrowers whose savings are squeezed by rising inflation. Four rounds of key rate hikes have taken home loan rates to 8.4% from a ten-year low of 6.6% just five months ago, which has also had an impact on second home purchases .

The real estate sector is on the right track after surviving the worst of the pandemic. Annual residential sales in 2022 have surpassed pre-Covid levels, and recent monthly sales trends indicate strong momentum.

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