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Will the latest RBI rate hike dampen the customer sentiments toward real estate investments?

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The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced a rate hike of 50 bps bringing the repo rate to 5.4%, citing the continued risk of inflation. Repo rate refers to the rate at which commercial banks borrow money from the Reserve Bank of India. The increase in repo rate translates into a higher cost of borrowing by the banks for retails and other loans, which in turn will be passed on to the borrowers, like for home loans, with a hike in the interest rate and higher EMI.

In the short-term view, there will be an adverse impact on the homebuyer sentiments, primarily in the affordable category. Three rate hikes in a span of 2 months has marked the end of the all-time best low interest rate era which took shape during the Covid times. However this will not result in the real estate sector losing the shine any time in the medium to long term.

Property prices in all the major cities, with an exception of Hyderabad, have not increased in the last 8-10 years, when seen in context of annual inflation of building materials. There are definitely lucrative pockets/localities within the cities that have seen good property price appreciation but the city level data, which the many of us real estate experts believe is a strong metric, shows non-high post-inflation movement in the property prices in the last decade. In fact GST and demonetization have helped correct property prices further, in the past, in the favour of home buyers. The property prices that we have currently are undoubtedly the most fair prices we have seen in the last few decades. Consistent rent appreciation of 4-5% every year, with all major cities seeing rent appreciation around 12% in the first half of 2022, the rental yield of the residential properties have moved from 1-3% to 3-5% now. Higher rental yield results in the home-buyers’ ability to absorb a higher EMI.

While the current rate hikes, when looked at in the timeframe of the last 2 months, seems harsh, it is imperative for us to understand that over the time period of the last 20 years, it is still very close to the lower than average repo rates. For the better part of the last decade, the repo rate has been in the range of 6-8%.

Home loans generally have a tenure of 20 years, and when we look at the recent rate hikes through a 20-year lens, it is clear that the over 20 years, the repo-rate hike and reduction typically averages out.

Covid lockdowns have brought people closer to wanting to purchase a home. Millennials, generally referred to as the ‘Generation Rent’, have seen a change in the mind-set towards purchasing a home. Compared to pre-Covid, when only 49% of millennials were looking to purchase a home, now the figure has risen to 63%.

A renewed desire to own a home post Covid, anticipation of property prices appreciation over the next decade, increase in the rental yield from 1-3% to 3-5% and still-affordable home loan interest rates, all indicate a major boom in the real estate market for the foreseeable future. The current RBI rate hikes are nothing but a bump on the road, which might slow the real estate market in the short term but will have no impact on the expected boom in the market in the medium-to-long term future.

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Views expressed above are the author’s own.