Real estate sector has been on a strong recovery path after surviving the worst of the pandemic. Annual residential sales in 2021 have reached within a striking distance of 2019 volumes, and recent monthly sales trends also show strong momentum. This has largely been driven by extremely low interest rates which supported homebuyers’ demand. However, 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 the burgeoning inflation, this turn in the interest rate cycle could be a significant headwind to real estate demand, points out a note of Knight Frank India.   

A hike of 50 basis points (bps) in the Repo Rate in the Monetary Policy Committee (MPC) meeting recently comes on the back of a 40-bps increase in May. Further, the significant 1 percentage point increase in the FY23 consumer inflation estimate to 6.7 per cent, which is higher than the RBI’s upper tolerance band of 6 per cent, also suggests that further rate hikes are likely. The RBI is likely to continue increasing the policy rate to narrow the gap between consumer inflation and the Repo Rate and reduce the extent of negative real interest rate in the economy, which still stands at -1.8 per cent, the note says.  

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. 

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 per cent increase in the EMI load for the homebuyer and an effective 3.38 per cent decrease in affordability in 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.