RBI's policy rate hike likely to hit housing demand

The Reserve Bank's decision to hike key policy rates will impact the growth of real estate industry and may hit the housing demand, according to industry players.

The Reserve Bank of India (RBI) on Wednesday hiked the benchmark lending rate by 40 basis points (bps) to 4.40 per cent to contain inflation. It also raised the amount of deposits that banks are required to maintain as cash reserve by 50 bps to 4.5 per cent to suck out Rs 87,000 crore of liquidity from the banking system.

Commenting on the policy, industry body CREDAI's President Harsh Vardhan Patodia, said, "The low repo rates had given a boost to the real estate sector during the course of the pandemic. Raising of repo rate by RBI is a surprise for real estate industry given the inflationary trends."

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"We are witnessing trends of growth momentum in the realty sector and developers have largely stayed resilient in the midst of challenges from the pandemic. Though this escalation will impact the buying power of consumers, we feel the impact will be taken in stride by the home buyers," he added.

Boman Irani, President, CREDAI-MCHI, said this sudden increase of repo rate coupled with inflation will indeed impact the industry’s growth.

"Given the escalations and skyrocketing prices of raw materials, buyers may become reluctant to borrow from banks at a higher rate of interest. Though RBI has maintained the benchmark lending rate at a record low for a long time, CREDAI-MCHI requests not to increase the rate further and to support the growth of industries," he added.

Anarock's Chairman Anuj Puri said this hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began.

"Moreover, rising interest rates and inflationary trends in basic raw materials in construction including cement, steel, labour cost etc will add to the burden of the residential sector, which did significantly well in the previous quarter – Q1 2022," Puri added.

He further said this rise in interest rates will ultimately impact overall acquisition cost for homebuyers and may dampen residential sales to some extent.

Gulam Zia, Senior Executive Director, Knight Frank India, said the policy rate hike will translate into higher EMIs for home loans. "However, we believe that improved homebuyer's attitude, preference for owning a house and strong wage growth will continue to support the housing market."

Amit Goyal, CEO, India Sotheby's International Realty, said this signals an end to the historical-low interest rates regime, as lending institutions will soon follow with increase in rates on deposits and loans.

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"We don't believe though, home loan rates will increase by more than half to one percent this year. These are still fairly low interest rates and home buyers should make use of it," Goyal added.

Vikas Wadhawan, Group CFO, Housing.com, PropTiger.com and Makaan.com, said the real estate industry is well positioned to manage any hike and was quite frankly expecting it as well to tackle the tight inflation.

"However, there will be a rise in the property prices coupled with the surging input costs, though the market sentiments, by far and large, will be stable," he added.

There will be an overall increase in the property prices but it will soon be balanced off because the market is strong and resilient, Nayan Raheja of Raheja Developers said .

Trehan Group's MD Saransh Trehan said this will marginally increase the cost of borrowing for property loan seekers.

"As the cost of home loan is only one component for a home buyer, the RBI's decision is unlikely to have any major impact on the real estate sector," he added.

Shraddha Kedia-Agarwal, Director, Transcon Developers, said the RBI's decision will further put a dent on the homebuyer's sentiments, impacting the overall demand.

This hike in policy rate is not welcome and will have a negative impact as home loan rates will increase immediately, Samantak Das, Chief Economist, and Head of Research and REIS, India, JLL, said.

Shiv Parekh, Founder, hBits, said, "Commercial real estate will benefit in the longer run with the rate hike. Especially income generating grade A properties will have more demand than other asset classes. Historically, real estate and gold have been used as a hedge against inflation."