The recent 50 basis point increase in the repo rate has brought interest rates back to pre-pandemic levels, making home loans expensive. Following the rate hikes in May, June and August of this year, the banks have revised upwards the rates for mortgage loans. The era of low interest rates, which fueled strong demand for housing, is now well over.
Mortgage rates are now around 7.4%, after hovering around 6.6% for the past two years. The impact of this rise in interest rates on home borrowers varies. Borrowers of fixed-rate mortgages are unaffected by interest rate increases because current interest rates are locked in for part or all of the term of their loans. Therefore, fixed rate borrowers will see no impact on their monthly EMIs or repayment amount. However, home borrowers, who took out a variable rate loan they got when interest rates were low, will now have to pay more interest.
While there is still no reason to panic over an impending slowdown in home sales, it is widely believed that another 30 to 40 basis point hike in repo rates will have a negative effect on house sales. The housing market is already beginning to feel the impact of rising interest rates and high inflation, which have reduced the purchasing power of home buyers.
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According to experts, the affordability of home buyers will decrease by about 10% due to the increase in rates. This basically means that a buyer, who used to afford a house costing around Rs 1 crore, can now only afford to pay Rs 89 lakh for a house. Homes are still selling, despite concerns that another rate hike could create negative sentiment among buyers. Many developers find themselves in a place where they know they have to sweeten the deal for the buyer.
Incentives are returning to the market in response to the housing affordability crisis and to restore consumer confidence. For the developer, incentives are a great way to attract buyers without reducing home prices. As the festival season approaches, it is likely that the developers will offer freebies and other incentives to buyers. While holiday season incentives are almost a regular feature, this year they could be key to ensuring that the sustained sales growth momentum continues.
The developers are bullish on sales as they believe the current growth cycle is driven by fundamentals such as strong buyer demand rather than speculation. Sales in the first half of 2022 (January-June) were the highest in over a decade and second only to the first half of 2010. The broad consensus is that in the short term, home sales could slow, although than the medium to long-term outlook still looks good.
This is due to a growing preference for home ownership among millennials. Millennials make up a significant percentage of first-time home buyers as they settle in and start families. The Covid pandemic has been a wake-up call for many, including millennials, who are looking for a sense of permanence. Owning a home provides a sense of security and an increase in disposable income has made this possible. There is also a growing desire for larger and more spacious homes, given the work from home or hybrid work model.
Over the past few months, demand for larger homes has increased, with dedicated offices, extra bedrooms, balconies, gyms, and modern gadgets and appliances. This trend should continue for the rest of the year. Demand is also strong for luxury and ultra luxury homes, especially from the NRI community. A weakened rupee boosted the purchasing power of NRIs, who showed interest in buying luxury homes in the towns and villages they originally belonged to. NRIs have also shown a preference for plotted developments, which has seen many developers enter this space.
Some worry that the rate hikes could have come at a worse time. Global commodity prices for building materials such as cement and steel have risen, raising concerns that this is being factored into property prices, making homes more expensive. The fears, however, are unfounded. Homes have always been considered a good investment and a hedge against inflation. The comparison homebuyers should really be looking at is the cost of owning a home versus the cost of renting.
For home buyers, now is a good time to invest in real estate before house prices rise or home loans become more expensive. Developers are confident that the incentives that will be on offer this festive season will attract many home buyers. Considering that the demand for homes is strong, the negative sentiment among buyers should be short-lived. The real estate sector will continue to grow this year.
(By Abhishiekh (Andy) Andlay, Founder of Andlay Estates)