Rate hike to spook potential buyers of affordable homes

The last week’s repo rate hike by the Reserve Bank of India, coupled with a hawkish outlook, seems to have dented the confidence realtors were exuding pursuant to earlier rate hikes. While homebuyers will have to brace for a price hike for a combination of reasons, developers fear that this will particularly spook the affordable homes segment.

“With the financial burden on homebuyers, we may see some pressure on sales volumes in the affordable and lower mid-range housing segments, which are more cost-conscious,” underscored Anuj Puri, Anarock Property Consultant Pvt Ltd.

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Since May 2022, the repo rate has been raised by 250 basis points (bps), with the latest hike of 25 bps on Wednesday last, taking it to 6.5%. Courtesy this, homebuyers are staring at the prospect of home loan rates breaching 9.5%-mark soon. This is accentuated by the fact that the apex bank has left the door open for further tightening, stating that inflation control is its immediate prerogative.

“The Reserve Bank did not rule out further interest rate hikes, which has compelled me to relook at my home loan options,” said Bengaluru-based lawyer Amrita Jain, who is looking for a residential property in the city. She’s now leaning towards a fixed interest rate home loan programme, driven by the uncertain horizon.

The rate hike of 25 bps will make EMIs (equated monthly instalments) expensive by ~ 2-4%. Borrowers will either have to shell out more money to repay their loans or will have to extend their tenure, pointed out V Swaminathan, executive chairman of loan distributor Andromeda Sales.

Piling on other cost hikes

The rise in credit costs (for both, buyers and developers) mounted over the inflationary pressures on various input costs, be it construction material or labour, the developer community unanimously agree on an uptick in housing prices.

“I see a drastic movement upwards in pricing across India,” said Bhavesh Kothari, founder and chief executive of realty consultancy Property First. “Prices will go up because construction costs have shot up in the last two years by 25-30%. Land prices have doubled, at the very least, because of which the new projects which are coming up are at a much higher rate. Adding to this is
the increased cost of funding,” he
explained.

“As a precursor, we had increased the rates in January earlier this year and we’ll probably wait till March for a next round of general increase,” informed chief financial officer of Brigade Enterprises, Atul Goyal.

The counter-strategies

Egged by the stress on price lines, real estate firms are now looking to change their product-mix to maintain sales volumes.

Developers may reduce the size of apartments, so that even if the price for the buyer goes up in terms of per square footage, the overall amount remains the same, said Angad Bedi, managing director at the realty firm BCD Group.

Other options include offering complementary value-added features such as complete furnishing or a certain percentage of assured rentals in larger establishments, instead of bringing down prices, he added.

On the other hand, developers such as the Vaishnavi Group have simply shifted focus to the upper premium or luxury segments which present a larger room to play within, in terms of financial margins. “These segments are affected to a lesser degree,” argued Darshan Govindaraju, director of the group.

Impact of IT job cuts

The recent series of job cuts in the technology sector has turned into a double whammy for residential realty market. “We’re watching this carefully,” said Brigade’s Goyal. Others agreed.

“In the coming few months we expect a trickle-down effect of the layoffs in the Rs 1.5 crore property bracket,” said Shivam Pathak, who is a sales manager at TG Developers. He pegged his clientele from the tech sector in Bengaluru at 60-70%.

Moving forward, a pause on the central bank’s rate hike cycle will help sustain the demand and confidence of homebuyers in the market, pointed out Ramesh Nair, CEO, India and market development, Asia, at investment management firm Colliers.