Home and car loan EMIs are set to cost more after the Reserve Bank of India (RBI) hiked the repo rate by 50 basis points to 4.9% on Wednesday.

A hike was inevitable considering that inflation continues above its target zone of 6%, but we are now entering the red zone, cautions Anuj Puri, chairman of property consultancy firm ANAROCK. “Any future hikes will reflect markedly on housing sales,” Puri warns.

This, according to Puri, will have some repercussions on housing uptake.

The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month, says Puri. “Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12% and above. Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments.”

However, the silver lining is that the Indian housing market is still largely end-user driven, so there is no investor mindset seeking the lowest possible entry point, he adds. “Genuine demand comes from an underlying aspiration for homeownership.”

“The RBI is tasked with controlling the spiralling inflation in the country but must simultaneously be careful to not hurt demand recovery. This is a tightrope walk under the best of circumstances,” Puri says.

This comes at a time when average residential housing prices in India increased 4% year-on-year in the first quarter of 2022, while unsold inventory declined marginally, signalling a revival in demand.

“We have observed a robust comeback in residential sales and launches in the last couple of quarters. From a real estate perspective, this hike in the policy rate comes as a hurdle as home loan rates will increase, putting a dent on the homebuyer's sentiments,” says Ramani Sastri, chairman and managing director at Sterling Developers Pvt. Ltd.

Any increase in the interest rate will further impact the costs of doing business and hence the move will hurt business sentiment too as the economy is still recovering from the pandemic, he adds.

Sastri, however, says there has been a fundamental change in buyers’ expectations and attitude towards homeownership and this will largely withstand marginal fluctuations in lending rates. “It also goes without saying that the real estate industry's perennial hope is fixed on lower interest rates as it improves affordability. There is still pent-up demand and even after the repo rate hike,” he says.

The current round of hikes could make the buyers apprehensive and they might as well adopt a wait and watch attitude, says Lincoln Bennet Rodrigues, founder of The Bennet and Bernard Company, a luxury home developer in Goa.

However, the continued wage and job growth in varied sectors will provide a cushion in the short term for the purchasing decisions, Rodrigues adds.

The all-time low home loan interest regime in the recent past had boosted the housing demand and also enabled a robust recovery in the real estate sector post the pandemic.

Rodrigues is hopeful that an improved homebuyer attitude and preference for owning a house will support the housing market and keep consumer demand buoyant in the near term. “The rate hike won’t have a significant impact as home loan interest rates have already gone down substantially in the recent past and buying decisions may not be altered by these marginal changes. The outlook for India Inc looks positive with higher affordability and disposable income in the hands of new-age investors,” he adds.

The two rate hikes in the last 45 days will hit consumer and business sentiments, says Harsh Vardhan Patodia, president of CREDAI, a lobby of real estate developers. With consumer loans and home loans getting costlier, there may be an impact on demand in the short-term, he adds.

Patodia, however, welcomed the 100% increase in limit for individual housing loans by Urban Cooperative Banks (UCBs) and Rural Cooperative Banks (RCBs) as the overall construction prices have shot up in the last six months.

The proposal to permit rural co-operative banks to extend finance to commercial real estate within the existing limit of 5% of their total assets will bring in more funding into real estate, says Patodia.

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