Indian central bank’s rate hikes leaves the real estate sector jittery


  • Real estate developers are worried that increasing raw material costs could hurt investor sentiment and bring a pause to the strong growth in real estate.
  • Raw materials required for construction have also been rising with inflation, further hurting customer purchasing power.
  • The industry expects to make concentrated efforts to reduce the spike in prices of raw materials such as cement, bricks, steel, etc, which would also give some relief to the sector.

Indian central bank’s second round of hike in interest rates could ruin the belated recovery in the real estate sector which has been reeling under the impact of Covid-19, despite home loan interest rates being at an all-time low until recently.

In the last one month, the Reserve Bank of India has hiked the repo rate by 90 basis points, and most banks have
already moved to reflect this in their repo-linked home loan rates.

Analysts believe that home buyers should brace for an increase in EMIs throughout this year, as if inflation was not enough of a problem as it is.

“We expect existing and new home borrowers to brace for an increase in home loan rates throughout the year and plan their financials accordingly,” said Kalpesh Dave, head corporate planning & strategy, Star Housing Finance.

However, it’s not just homebuyers who will be impacted by the rise in borrowing costs. Even real estate developers will face the heat of the moment, say analysts. Adding to it, for them it could directly impact the sales of residential homes as customers would stay away for a while due to the rise in costs.

Also, not to forget all the raw materials required for construction have been rising with the inflation, further hurting customer purchasing power.

“A rise in inflation can soften the stance on an otherwise robust real estate industry. Already raw material prices are increasing and an unbridled rate of inflation will further drive the input costs northwards, therefore resulting in cost overruns for the developer fraternity,” said Suren Goyal, partner at RPS Group, real estate developer.

“In such a case they will have no option but to pass on the price to the homebuyers,” he further added.

The move would impact already strong demand and liquidity
After a lull due to Covid, the demand to buy a house had recovered due to the growing need for home ownership and de-escalation of the covid crisis.

“The current rise in repo rate might dent an otherwise upbeat bullish demand. Meanwhile, an increase in lending rates might plague growth in the affordable segment, which is very closely linked to the credit market,” said Nakul Mathur, MD at Avanta India.

“From a real estate perspective, this hike in the policy rate comes as a hurdle as home loan rates will increase, putting a dent on the homebuyer’s sentiments. Any increase in the interest rate will further impact the costs of doing business and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic,” said Ramani Sastri, chairman & managing director at Sterling Developers.

RBI and finance ministry expected to intervene at some point
However, in the long run, to keep the momentum going, the industry expects RBI and the finance ministry to take steps to keep the liquidity growth in the market.

“The banking and other financing institutions should play a pivotal role in ensuring a smooth flow of liquidity to the people,” said Subhash Goel, managing director at Goel Ganga Developments.

However, the RBI did provide some respite to the space by announcing measures like doubling the amount of loan cooperative banks can issue for housing to improve credit flow to the sector.

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