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 percent increase in the EMI load for the homebuyer and an effective 3.38 percent decrease in affordability basis the Knight Frank Affordability Index.
The real estate sector has been on a strong recovery path after surviving the worst of the pandemic. Annual residential sales in 2021 reached within striking distance of 2019 volumes, and recent monthly sales trends show strong momentum. This has largely been driven by extremely low-interest rates that 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.
Cumulative REPO rate hike of 90 basis points
The 50-basis point (bps) hike in the repo rate in the June Monetary Policy Committee (MPC) announcement comes after a 40-bps increase earlier in May. Further, the significant 1 percentage point increase in the FY23 consumer inflation estimate to 6.7 percent, which is higher than RBI’s upper tolerance band of 6 percent, also suggests further rate hikes are likely.
The RBI will likely 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 percent.
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.
Impact of home loan increase on EMI and affordability
|Increase in home loan interest rate(in basis points)||Increase in EMI amount||Decrease in Knight Frank Affordability Index levels (EMI/Household Income)|
Source: Knight Frank Research
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 percent increase in the EMI load for the homebuyer and an effective 3.38 percent decrease in affordability basis the Knight Frank Affordability Index.
This analysis does not account for a change 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.
Average for Bengaluru
Even while basis the home loan terms of individual homebuyers, there will be the varying level of lender response measures the increase in repo rate earlier during May and now in June will make EMIs costlier for buyers.
For instance, assuming complete transmission of the repo rate increase, for a home buyer in Bengaluru with a home loan of Rs 75 lakh, the EMI has increased from Rs 59,962 per month before the rate hike to Rs 61,803 in May and Rs INR 64,141 in June.
Average for NCR
With the increase in home loan interest rate during May and now in June, EMIs have increased for the borrower. For instance, for a home buyer in NCR with a home loan of Rs 1 crore, the EMI has increased from Rs 79,949 per month before the rate hike to Rs 82,404 in May and now Rs 85,521 in June.
Average for Mumbai
Similarly for Mumbai, for a home buyer in Mumbai with a home loan of Rs 2 crore, the EMI has increased from Rs 159,898 per month before the rate hike to Rs 164,807 in May and now Rs 171,041 in June.
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, crediting our belief that residential demand should not be impacted materially in 2022.
The author Yashwin Bangera is Vice President-Research, Knight Frank India. Views expressed are personal.