The real estate sector has been facing a perfect storm with the lingering effects of the COVID-19 pandemic, rising interest rates and escalating raw material costs, all together affecting an otherwise likely real estate boom in India. All India House Price Index (HPI) has surged by almost 10 percent in the past three years amidst the pandemic and elevated inflation and interest rates.
A key factor that impacts the sales is the sentiment of the consumers; positive sentiments often lead to increased purchases, while negative sentiments deter potential buyers.
The RBI has maintained the benchmark interest rate at 6.5 percent, causing concern for the rate-sensitive real estate industry. Despite lending rates staying steady, the continuous 250 basis point hikes since May 2022 have dented the demand segment in major cities. In light of this situation, it is imperative for the Reserve Bank of India (RBI) to take decisive action and reduce interest rates, thus reviving the real estate market and stimulating economic growth.
Impact of RBI's interest rate hikes on real estate
CREDAI has cautioned RBI that another rate hike will escalate borrowing costs for developers, leading to even higher project expenses and housing prices. With prices already having increased by 5-6 percent last year, this move, combined with rising raw material costs, could squeeze already slim margins for real estate projects, rendering certain developments financially infeasible for developers.
Hiked interest rates have not only dissuaded potential homebuyers from availing loans but have also impacted developers' cost of capital. The reduction in repo rates would improve buyer’s sentiment and fuel housing sales and help put more liquidity into the hands of consumers encouraging them to buy homes.
Need for reducing rates
A reduction in the repo rate is expected to facilitate robust GDP growth. Considering the period between March 2021 and March 2022, with the repo rate hovering around 4 - 4.4 percent, India had registered a GDP growth of 8.95 percent. To bring back the lost momentum in the real estate market, there is an urgent need for the RBI to reduce interest rates. Lowering the rates can infuse a renewed sense of confidence among consumers and developers, boosting the animal spirit in the market.
Festival Season - an opportune moment
The rising interest rates have led to a surge in stalled projects, as developers struggle to secure funding amidst increasing capital costs. This has left homebuyers waiting for their dream homes to be completed. Lowering interest rates by the RBI can serve as a lifeline for stalled projects, making finance more accessible for developers to resume work and fulfill buyers' dreams.
Moreover, as the festive season approaches, it presents a golden opportunity to reinvigorate the real estate market exercising the combination of attractive deals and reduced interest rates ahead of the festive season. The festive period is traditionally considered auspicious for buying property in India, the RBI can help builders tap into this sentiment and induce the much-needed impetus.
— The author, Divaker Bhalla, is CEO and Co-Founder PeProp.Money. The views expressed are personal.
(Edited by : C H Unnikrishnan)
First Published: Aug 5, 2023 8:13 AM IST
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