The hike in repo rate, albeit by a lower amount than previous hikes, and the grim undertone of hawkishness displayed by the Reserve Bank of India has plunged the residential real estate segment into gloom, apprehending a hit to demand for low and mid-income housing.

The gloom is pronounced among those making houses for the affordable segment as well as houses priced up to ₹2 crore, who are almost entirely dependent on bank loans for their purchases.

Publicly, while realtors spoke bravely about demand momentum sustaining and the growth in the economy, privately many of them admitted it was not a good news for the sector, which has just got back on its feet after years of sluggish demand and stagnating prices.

A top official at a city-based developer, which gets the bulk of its revenues from the lower end of residential segment, said that they may have to offer hefty discounts and incentives to lure homebuyers.  

Steep rate hikes

In nine months, the repo rate has risen 250 basis points to touch a seven-year high of 6.5 per cent. RBI’s determination to stamp out inflation indicates this is not the last of the rate hikes. The marginal cost of lending rates for banks show that about 60 per cent of the hike has been transmitted. The borrowing cost will now rise 10-20 basis points with Wednesday’s hike. A 20-year, ₹30-lakh loan at 8.75 per cent will translate into a near 2 per cent rise in monthly outgo. So far, home loan rates have been absorbed by extending the tenure, but beyond a point, this is not feasible.

Home price trends

Home prices have also risen around 7-10 per cent pan-India and in some places such as the National Capital Region, it has risen in high double digits, making the cost of homeownership expensive. Knight Frank India’s affordability index for the December quarter showed a deterioration of 1.4 per cent over the previous year.

“A dip in the immediate term seems likely,” said Rohan Sharma, Director, JLL India, referring to demand in affordable housing.

“We saw early signs of a dip even in the fourth quarter (October-December) where sales fell marginally but the impact was beginning to show,’ he said.

With the bulk of the residential market demand being still home loan driven, a short-term dip in sentiment is likely with mortgage rates trending higher, he explained.

The Union Budget did put more money in the hands of people by offering a tax rebate on income up to ₹7 lakhs and rationalising tax slabs. But the rising mortgage rates and the job losses in some sectors are likely to make people hold on to their savings.

Property consultant ANAROCK in a survey last month found that, in 2022, the demand for affordable housing had fallen steeply from 2018. Among the unsold inventory in the country, a good portion was in the affordable segment.