Home / Markets / Mark To Market /  The real estate sector is getting a reality check with the rising rates

Interest rates are on the rise and investors in real estate stocks are on shaky ground. History suggests when interest rates are high, sales take a hit. Rate hikes beyond 150 basis points (bps) hurt residential real estate sales, an analysis by Motilal Oswal Financial Services Ltd showed. One basis point is 0.01%.

The Reserve Bank of India (RBI) raised the repo-rate by 300 bps from FY2005 to 9% in July 2008, the domestic broking firm pointed out in a a report dated 27 June. The repo rate is the rate at which the RBI lends to commercial banks. Further, between March 2009 and March 2011, rates were increased by 375 bps to 8.75%. This weighed on housing demand.

A painful past
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A painful past

The RBI’s latest rate hiking cycle began in May 2022 and, so far, it has raised the repo rate by 90 bps to 4.90%. As retail inflation is still high, more rate hikes are on the cards. Besides expensive home loans, recent price increases by real estate companies could prompt customers to delay home buying decisions.

The Motilal Oswal report highlighted that both the previous instances of rate hikes were accompanied by a strong pricing cycle. “As per the National Housing Board, housing prices in top cities witnessed a cumulative 70% rise between CY04 and CY07 and by 25% over CY09-11, adding onto the increased EMI burden," said the report. EMI is equated monthly instalment. Latest management commentaries by listed real estate developers indicate that construction costs have risen by 10-15%, following which real estate developers raised prices by 5-8% on select projects, said analysts.

“Residential prices have increased in H1 2022 and will have an impact on overall affordability. Apart from home loans, home prices and homebuyer income levels also form critical factors that determine affordability," said Yashwin Bangera, vice president, research, Knight Frank India. Bangera said that the 90 bps increase in the home loan rate effective in May and June 2022, will cause an average 2% fall in the Knight Frank Affordability Index across markets and a 6.97% rise in EMI load.

In FY22, key listed developers saw record pre-sales increase of 47% year-on-year, according to IIFL Securities Ltd. For FY23, realty developers expect strong sales to continue, but analysts say there could be a slowdown as affordability takes a hit. In this calendar year, the Nifty Realty index has fallen by 20% and is seen remaining under pressure. The ongoing consolidation would aid market share gains for large developers, but the trajectory of new launches and pre-sales momentum remain crucial triggers for real estate stocks.

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