Breach in  Home Affordability!

The latest repo rate hike of 50 basis points to 5.4%, third in a series ,resulting in a cumulative 140 bps rate hike over the last 3 months, has  eroded home affordability. This may not immediately impact the housing demand, yet it may well slow down the momentum of home sales, particularly in the affordable and mid-priced segment.  

It is In view of the elevated levels of inflation which remains above RBI’s upper target band of 6 percent that the 50 bps hike in repo rate has been carried out. Considering the inflation forecast of 7.1 percent in Q2 and 6.4 percent in Q3, more repo rate hikes are in the offing. Even before the present hike, home affordability was considerably impacted with almost a double digit  rise in EMI by nearly 11 percent. Taking  into account the current repo rate hike and expected hikes in coming months, home affordability will be significantly breached. And the big question is how will it impact the demand for homes that has been exceptionally high in the first half of this year. 

Residential sales had hit a record 9 year high across top 8 markets of Mumbai, Delhi NCR, Bangalore, Pune, Chennai, Hyderabad, Kolkata and Ahmedabad in  H1 2022 despite YoY increase of 3-9 percent in property prices across all markets. But then the higher cost of property acquisition  due to increasing interest rates and rising property prices had its fall out on housing sales during April-June 2022. In this quarter, housing sales fell 15 percent sequentially in Q2 CY 2022 in top 7 cities .The home purchase affordability across markets had gone down by 200-300 basis points across markets due to 90 bps repo rate rise. .   The current and the subsequent hikes in repo rates may well further cast its shadow over the housing demand.. 

Real estate experts believe that the hardening of interest rates , coupled with increase in property prices may not have any bearing on the high end and luxury segment, though it may adversely impact the affordable and mid-priced segment. The share of affordable housing overall housing sales  has been going down. The  sales share of homes below Rs 50 lakhs  in H1 2022 declined to 40 percent from 48 percent prior to 2021. 

The majority opinion in the real estate sector is that there is a high demand for all the segments of real estate. Moreover, the appetite for home ownership remains especially high .  Considering that interest rates are still in single digit , it should support demand momentum. Bankers are also positive that despite interest rate hikes, the robust loan growth will continue. Despite the global headwinds, the Indian economy is doing well and real estate still remains the best bet as an asset class for investment. But all said and done, the real test lies ahead during the upcoming festive season which will be the real barometer to determine the impact of the interest rate hikes on housing sales.