Considering the current two-decade low home loan interest rates and subdued housing prices, people planning to buy a new house are in for a rude awakening, as things have changed dramatically in the last few weeks. On the one hand, home prices have begun to rise to some extent as a result of high inflation, while interest rates have risen sharply. While many experts believe that the situation for new home buyers is deteriorating, others believe that all is not lost. Here's how recent events are likely to affect new homebuyers.
Most raw materials used in construction, such as steel and cement, have seen significant price increases in recent months, causing home prices to rise. Higher interest rates will exacerbate the situation. "Rising interest rates, along with elevated property construction costs and product price pressures, could have a negative impact on real estate buyer sentiment," says Shishir Baijal, Chairman & Managing Director, Knight Frank India.
"This hike in the policy rate comes as a hurdle as home loan rates will increase, putting a dent in homebuyer sentiments," says Ramani Sastri, Chairman & MD, Sterling Developers. Any increase in interest rates will increase the costs of doing business, and thus the move will hurt business sentiment as the economy recovers from the pandemic."
The most vulnerable will be first-time home buyers.
The affordable housing segment will bear the brunt of the pain, as the rate hike is expected to affect the vast majority of buyers. "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 Anuj Puri, Chairman – ANAROCK. Interest rates will remain lower than they were during the global financial crisis of 2008, when they reached 12 percent and higher. Nonetheless, the current increase will be reflected in residential sales volumes in the coming months, particularly in the affordable and mid-segment segments.
There will be no respite in the near future.
There is no relief in sight in the near future, as stubborn inflation numbers are likely to take some time to fall into the RBI's comfort zone. "As long as inflation remains above the RBI's upper tolerance level of 6% until December of this year, it will undoubtedly have an impact on housing demand," says Ram Raheja, Director, S Raheja Realty.
There will be no relief for home buyers until there is a clear indication that hyperinflation and the Russia-Ukraine war are over. "Furthermore, monetary policy tightening by central banks around the world, as well as any resolution to the protracted Russia-Ukraine conflict," says Baijal.
The silver lining for first-time home buyers
Many experts believe that these rate increases are in the best interests of the economy and will ultimately benefit all homebuyers. "While the recent action will raise home loan rates, an unstable economy is not good for the overall health of the real estate industry." "For the industry to function optimally, the economy must continue to grow in a stable, inclusive, and consistent manner," says Atul Goel Pune, MD, Goel Ganga Group.
Given that mortgage rates are expected to rise, the policy rate increase is expected to act more as a mood disruptor for home buyers. The impact of the rate hike on home loan EMIs, on the other hand, is unlikely to be significant because these loans have a longer term. Banks and mortgage lenders only partially transmitted the previous policy rate hike. Furthermore, interest rates are expected to remain at decadal lows, so while the opportunity for homebuyers is diminishing, it is critical to understand that affordability remains high and buying momentum is expected to remain largely intact," says Samantak Das, Chief Economist and Head Research and REIS, India, JLL.
The current situation has taught borrowers how to deal with a long-term loan, such as a home loan, where the interest rate is bound to fluctuate up and down during the term. "There has been a fundamental shift in buyers' expectations and attitudes toward homeownership, which will largely withstand marginal fluctuations in lending rates," Sastri says.