Rising interest rate may dent homebuyers' affordability: Report
2 min read 13 Jun 2022, 01:40 PM ISTThe increase in home loan rates usually translates to an increase in tenure rather than an actual increase in EMI, effectively subduing its impact to some extent.
PremiumThe upturn in the interest rate cycle could be a significant headwind for the real estate sector that has been on a strong recovery path after surviving the worst of the pandemic, Knight Frank India said in a report released today.
The report said, "Annual residential sales in 2021 have reached within striking distance of 2019 volumes and recent monthly sales trends also show strong momentum. This has largely been driven by extremely low-interest rates which supported homebuyer demand. However, a sharp rise in inflation has forced the central bank to raise interest rates and suck out excess liquidity in the market. While it is a critical tool in the fight against burgeoning inflation, this turn in the interest rate cycle could be a significant headwind to real estate demand," as per the report.
The 50-bps hike in the repo rate in June Monetary Policy Committee (MPC) announcement comes on the back of a 40-bps increase in May. Further, the significant 1 percentage point increase in the FY23 consumer inflation estimate to 6.7%, which is higher than RBI’s upper tolerance band of 6%, also suggests that further rate hikes are likely. The RBI is likely to continue increasing the policy rate to narrow the gap between consumer inflation and repo rate and reduce the extent of the negative real interest rate in the economy, which still stands at -1.8%.
While home loan interest rates are still well below pre-pandemic levels, it is worthwhile to gauge the impact of every increase in the home loan rate on the EMI load and eventual affordability levels of the end consumers, said the report.
Impact of home loan increase on EMI and affordability
Note: Affordability and income levels are calculated keeping all variables constant, except for the interest rate.
“Home loan rates are still approximately 150 bps below those prevailing in 2019 and a reversion to those levels will result in an 11.73% increase in the EMI load for the homebuyer and an effective 3.38% decrease in affordability basis the Knight Frank Affordability Index. This analysis does not account for changes in income levels or house prices and considers interest rates as the only variable. House price levels have increased over the past 12 months across most markets and should also have a material impact on affordability," as per the report
In practical terms, the increase in home loan rates usually translates to an increase in tenure rather than an actual increase in EMI, effectively subduing its impact to some extent. While steep, the interest rate hikes are not a surprise and have been factored into the market sentiment which continues to hold strong. “We do not believe that home loan rates approaching 2019 levels will be enough to subdue market momentum significantly. The performance of the broader economy will have a greater bearing on market momentum for the remainder of the year as it dictates homebuyer income levels and demands much more directly. As things stand currently, the RBI has kept the FY23 GDP growth estimate constant giving credence to our belief that residential demand should not be impacted materially in 2022," said the report.
