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Housing units are selling like hot cakes in the key residential property market of Mumbai. Data compiled by property consultant Knight Frank India showed that Mumbai city (BMC area) saw 11,339 property sale registrations in July– the best in a decade for that particular month.

What’s puzzling is that this eye-popping data comes in the backdrop of the overall cost of purchasing a house heading northward. Since May, the Reserve Bank of India (RBI) has the hiked repo rate by 90 basis points (bps), making home loans dearer.

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Starting 1 April, the Maharashtra state government introduced a metro cess. Consequently, the stamp duty on property bought in Mumbai rose to 6% from 5%. Further, key listed developers are also on a price hike spree to offset the negative impact of commodity inflation on their margins. For instance, Godrej Properties Ltd raised prices by around 5% in Q4FY22 and 3-4% in Q1FY23 across its product portfolio, the management said in its latest earnings call.

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Even so, consumer sentiment is buoyant. “Home loan rates are rising and currently at around 7.5%, but still lower than 2019 (pre-pandemic level), stamp duty has also risen in the Mumbai market and builders have taken price hikes of around 4-6% across projects. At the same time, incomes in sectors like IT have risen at a comparatively faster pace in the last one year. Other segments such as pharma and BFSI have also seen decent wage improvement post Covid. So, overall, the dent on affordability, as things stand today, is not very high," said Vivek Rathi, director – research, Knight Frank India. All these factors put together are aiding demand for housing units in Mumbai as well as Pune and Bengaluru.

Also, to mitigate the impact of elevated mortgage rates on sales, some companies are offering interesting schemes. For instance, in June, Macrotech Developers Ltd (Lodha) rolled out an ‘interest locked’ initiative. Under this plan, an increase in equated monthly installments due to rising interest rates beyond 6.99% will be borne by Lodha until June 2024. The maximum increase to be absorbed by the company is capped at 150bps.

But that’s not all. Factors on the supply-side are also boosting potential demand for residential units in Mumbai.

“The increased sense of owning a house during the peak of the pandemic had led to bumper sales. Consequently, the ready-to-move inventory for many Mumbai-focused realty developers got exhausted. Since interest rates are on an upward trajectory, customers are in a panic buying mode, in fear of property prices seeing a higher-than-expected jump going ahead," said an analyst with a domestic brokerage house, seeking anonymity. This is driving pre-sales for newly launched projects in the city.

Meanwhile, the Nifty Realty index is down around 9% in CY22 so far. As the chart alongside shows, the shares of companies that have projects in Mumbai have also been under pressure. Note that these companies have strong launch pipelines for FY23. Of course, timely execution remains a crucial trigger for their stocks. Now, even though the property registration data, which is one of the indicators of business activity in the real estate sector, has held firm, anticipation of interest rate hikes continues to be a common sentiment dampener. Also, the overall market mood remains muted towards high-beta stocks such as real estate, said analysts.

At the RBI’s policy meeting on 5 August, repo rate is expected to rise further by 35-50bps. “We expect RBI to hike rates by another 50bps this week. If interest rates continue to rise accompanied by rising property rates, then this sales momentum may see some compression," Rathi cautioned.

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