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A spike in mortgage rates is beginning to price at least some buyers out of the housing market, data on home loans indicated.

Loans outstanding for buying homes grew at their slowest sequential pace in 10 months in May, rising 0.15% to 17.1 trillion, data released last week by the Reserve Bank of India (RBI) showed. Data for June will be available only by the end of this month. This was the first time in six months that the monthly growth rate slowed to less than 1%.

The growth rate in home loans peaked in March when it rose 6.7% from the previous month. It has since slowed down, dropping to 1.3% in April.

A surge in inflation has forced the Reserve Bank of India to raise the benchmark repo rate by 90 basis points in May and June. The rate hikes are intended to further reduce demand and cool prices in the economy. RBI is likely to continue raising rates as the inflation-adjusted or real interest rate remains in negative territory.

The repo rate, or the rate at which RBI lends money to commercial banks, stands at 4.9%, with retail inflation running at 7.04% in May. Mortgage loans are largely benchmarked to the repo rate. With rising rates, demand for personal loans too has moderated by around 170 basis points (bps) between March and May, while overall credit offtake has remained flat. As a result, the share of home loans in total credit declined marginally from 14.27% in April to 14.21% in May. The momentum has also moderated marginally from a year ago. The growth in home loans was 13.75% in April and 13.71% in May. Growth in personal loans and aggregate bank credit jumped nearly 170 bps and 100 bps from a year earlier over the same period.

Meanwhile, gauging the impact of this rate hike transmission on mortgage rates shows that the weighted average of lending rates of scheduled commercial banks on fresh loans was up 23 bps between March and May.

Affordability has declined, too, showed a separate set of data from Knight Frank India, which tracks the equated monthly instalment-to-income ratio for an average household. Its proprietary Affordability Index for the six months ended 30 June shows all markets have seen a decline in affordability due to the recent rise in home loan rates following the rise in repo rates. Home purchase affordability decreased by 2% on average across markets, and EMI load increased by 6.97%.

“Home affordability, due to the rise in home loan rates by 90 bps, has worsened in the last couple of months," said Shishir Baijal, chairman and managing director, Knight Frank India. “However, despite the hike in rates, markets remain largely affordable. This, coupled with the positive change in sentiments towards home ownership, we expect demand to remain unhindered with the momentum backed by the latent demand in the market continues."

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