Demand for housing loans in India may not shrink even as the country’s rate-setting panel embarks on a gradual normalisation of interest rates. Despite the probability of continued rate hikes in the coming months, home loan rates are expected to be cheaper compared to pre-Covid levels and could be attractive for borrowers, according to at least six experts and officials at housing finance companies with whom Moneycontrol spoke to on Wednesday, May 11.
The Reserve Bank of India (RBI) in a surprise move hiked the repo rate by 40 basis points to 4.40 percent on May 4, citing inflationary concerns. The repo rate is the rate at which the central bank lends short-term funds to banks. Lenders, of course, have the option of whether or not to pass the rate hike on to borrowers.
Following the RBI’s move, Housing Development Finance Corporation (HDFC) increased its retail prime lending rate (RPLR) on housing loans by 30 basis points, applicable to both existing and new borrowers, from May 9. Simply put, RPLR is the rate at which housing finance companies lend to their most creditworthy customers. Following the RPLR hike, interest rates on HDFC’s home loans will be in the range of 7 percent to 7.45 percent, which will automatically translate into higher equated monthly instalments (EMIs) and/or longer tenures of the loans for borrowers.
Despite the increase, though, experts point out home loans are cheaper than compared to the 8 percent and more levels just before the pandemic. That apart, the expectation of a rise in interest rates largely rests on the premise that rate hikes by the RBI will be gradual. In a fiercely competitive market, large housing financiers would also shy away from continuously raising home loan rates.
“Currently, the lowest rates have nudged towards 7 percent on small loans under Rs 30 lakh, while they are still under 7.5 percent for large loans above Rs 75 lakh,” said Pankaj Bansal, chief business officer (CBO) at BankBazaar.com. “The thing that impacts the decision to buy property the most is the buyer’s readiness.”
Borrowers also have the option to go for longer-term loans or prepaying a part of the existing loan to cushion and spread out the impact of higher EMIs when the overall interest goes up, say experts.
According to Vinod Nair, head of research at Geojit Financial Services, economic recovery is picking up and credit growth will be continue to be high despite the rise in rates. Both banks and housing finance companies will benefit from this trend, he said.
Fundamental factors at play
Experts and industry officials said that even though rate hikes are a sentiment dampener, they cannot be the sole reason why a committed buyer decides to not seek financing. A lot of fundamental factors, like geographies, demographics and growing culture of nuclear families too come into play. Housing demand is also supported by favourable tax regimes and the government’s thrust on the sector.
According to a recent CRISIL report, the momentum in housing demand across India’s top six cities is expected to continue in this fiscal year and grow 5-to-10 percent despite rising property prices, interest rates and a high base effect, supported by favourable demographics and urbanisation. The rating agency estimates that housing demand rose a solid 33-38 percent in the last fiscal year ended March 31, surpassing pre-Covid-19 levels, albeit on a lower base.
“Demand for housing is mildly impacted by interest rates, while fundamental factors play a major role,” said Jairam Sridharan, managing director of Piramal Capital Housing Finance.
“When the interest rates were historically low over the last two years, demand for housing was subdued as incomes did not rise. Now, home prices are suppressed and affordability has improved and the accumulated demand for housing will start showing, irrespective of the rise in rates,” he added.
In fact, HDFC chairman Deepak Parekh in an earlier interview to Moneycontrol said in his 44-year stint with HDFC, he had not seen housing demand the way it is today. Parekh had said that the large inventory of unsold housing inventory is also being liquidated because people have started buying homes.
According to BankBazaar’s annual Aspiration Index survey, the two most important things for Indians are home ownership and saving for children’s education, said the BankBazaar CBO, adding that Indians will seek to fulfil this aspiration despite the challenges.
However, Piramal Capital Housing Finance’s Sridharan said that housing finance companies will have to figure out a strategy to balance their assets and liabilities in a rising interest rate scenario.“The key challenge will be to hold on to rates, while on the liability side housing financiers would want to assess how much of their liabilities is exposed to higher rates. For some time, the liability side will dominate and squeeze margins,” Sridharan added.