The hike in interest rates by the Reserve Bank of India (RBI) does not appear to have a significant impact on people who borrow money to buy their dream homes, according to Reserve Bank data, as bank home loan outstanding nearly doubled to Rs 16.85 lakh crore in the last five years.
Even in the first five months of the current fiscal, bank home loan outstanding grew by double digits, despite the Reserve Bank raising the key interest rate by a whopping 140 basis points (bps) three times during this period, resulting in a hike in the home loan rate.
In September, the repo rate was raised by 50 basis points.
According to RBI data, the banks’ outstanding housing loans stood at Rs 8,60,086 crore at the end of fiscal 2016-17, and this figure is expected to rise to Rs 16,84,424 crore by the end of fiscal 2021-22.
According to banking and real estate experts, while interest rates are important, they do not deter home buyers because the decision is based on current income and prospects.
People are also becoming more aware that interest rates fluctuate throughout a loan’s life cycle, typically 15 years.
H T Solanki, General Manager – Mortgages and Other Retail Assets at Bank of Baroda, commented on the bank’s growing loan portfolio, saying price point is an important factor because home purchases are usually made with borrowed money.
“However, home loans are also a long-duration product, and customers expect changes in interest rates during the tenure of the loan. Further, the average pay increases in the range of 8%-12% in the country also help to mitigate the impact of a rate increase to a certain extent,” he said.
According to RBI data, banks’ outstanding housing loans increased by 13.7% to 16.4% yearly in the first five months of the current fiscal year.
The outstanding balance at the end of August 2022 has risen to Rs 17.85 lakh crore.
“I don’t think interest rate hike will have a material impact on demand for home loans,” said Renu Sud Karnad, Managing Director of HDFC, concerning the rising interest rates.
A house purchase, unlike other goods, is planned after extensive research within the family, according to the senior banker.
According to her, housing loans have a floating interest rate and, unlike a car or a durable consumer loan, are typically for 12 to 15 years.
“And hence increase in interest rates have a relatively less impact on the cash flow. Usually, 2 to 3 interest rate cycles play out during the loan timeframe of 12 to 15 years. So borrowers understand that interest rates may also come down during such a long loan tenure,” Sud explained.
Karnad and Solanki, as well as realtors, stated that housing demand remains healthy and that sales of residential properties have seen a strong revival in the last 12-15 months.
According to JLL India’s chief economist Samantak Das, the home loan interest rate has been declining since March 2016, from an average of 9.45 percent to 6.95 percent until April 2022.
This was consistent with the RBI policy rate (repo), which was on a downward trend, falling from 6.25% in March 2017 to 4% in March 2022.
Noting that the RBI raised the repo rate by 190 basis points in the current fiscal year, Das stated that the transmission to the home loan interest rate is 140-150 basis points, bringing the mortgage rate to around 8.85%.
“However, home sales are still robust and may reach a decadal high by 2022. This may be attributable to the strong festive demand coupled with stable pricing and relatively lower home loan interest rate compared to the peak of 10%-11% witnessed 8-10 years back,” he said.
On the other hand, Das warned that the continuous rise in home loan interest rates and EMIs could disrupt sentiment.
Anarock, one of the leading housing brokerage firms, recently reported that housing sales increased 87% from January to September across seven cities to 2,72,709 units, surpassing the total number of transactions recorded in 2019 pre-COVID year.
The consultant tracked prior sales in seven major cities, including Delhi-NCR, Mumbai Metropolitan Region (MMR), Chennai, Kolkata, Bengaluru, Hyderabad, and Pune.
In the January-September 2021 period, sales totaled 1,45,651 units.
This calendar year’s January-September figure is higher than 2,61,358 units sold in 2019.
Residential property sales fell to 1,38,344 units in 2020 as a result of the COVID-19-induced lockdowns.
The primary housing market in India reopened last year due to pent-up demand, and sales are expected to reach 2,36,516 units by 2021. This year’s strong momentum has lasted until September.
Realtors are hoping that sales momentum will continue despite mortgage rates rising. Property experts expect pent-up and holiday demand to carry the market.