Long-struggling affordable housing segment sees ray of hope after RBI cuts key policy rate

After a prolonged period of sales decline and low levels of supply, sales in the affordable housing segment may see a new lease of life after the Reserve Bank of India (RBI) cut its key repo rate by 25 basis points to 6.25 percent, paving the way for lower interest rates on home loans. The downside, however, remains in the form of a continued increase in home prices across all markets, with inflation continuing to be on the higher end, observers noted.

"I believe that this move will have a positive impact on the affordable housing segment, which is a priority area for the government. With lower interest rates, more homebuyers will be able to afford homes, leading to increased sales and improved liquidity for developers. This, in turn, will encourage developers to launch more affordable housing projects, addressing the huge demand-supply gap in this segment," said G Hari Babu, national president, National Real Estate Development Council (NAREDCO).

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According to real estate observers, the share of affordable housing (priced Rs 50 lakh or less) has declined since the end of the COVID-19 pandemic, due to people with established credit profiles availing loans easily to move to higher price points, even as the RBI hiking and holding its policy rate priced out first-time buyers who typically have lower credit scores from the market.

Accordingly, with rising construction costs, high home loan interest rates, thin margins and more lucrative opportunities in mid, premium and luxury housing, large developers have continued to vacate the affordable housing space, and the fall in supply has pushed up prices for affordable housing units, making them further inaccessible to homebuyers.

The new development, however, has been welcomed by most developers and observers.

"For the real estate sector, this development is a significant boost, particularly for affordable and mid-segment housing, where demand is steadily rising. Lower borrowing costs will further enhance home loan affordability, bringing the dream of homeownership closer for many aspiring buyers. Additionally, this move is likely to regenerate investments in the real estate sector, providing the much-needed motivation to sustain its growth," said Venkatesh Gopalakrishnan, managing director of Shapoorji Pallonji Real Estate.

Observers noted that home prices have continued to increase across most markets at an above-average rate. According to data shared by Anarock Research, the average prices of a home increased by 21 percent year-on-year in 2024 to Rs 8,590 per square foot. In markets such as the National Capital Region, home prices rose by as much as 30 percent year-on-year.

"The rate cut may be less effective due to rising property prices if inflation remains as high as it is now. Also, it remains to be seen if banks pass on the full benefit to borrowers in a timely and seamless manner," said Anuj Puri, chairman of Anarock Group.

Also Read: Home loan interest rate: EMI relief for home loan borrowers as RBI slashes repo rate by 25 bps

Pankaj Kumar Jain, Director KW Group, also echoed similar view and said that it is a positive move that will give a big push to affordable housing. Zero tax till 12 lakh income and subsequently reduction of home loan rates is a big indication that a big push is being given to affordable housing.

Mohit Goel, Managing Director, Omaxe Limited, said that with inflation well within control and fiscal policies in the FY26 budget offering significant relief to the middle class, this rate cut also provides a much-needed push for affordable housing.

"We anticipate this rate cut to be a catalyst, igniting homebuyer sentiment, enhancing affordability, and potentially unleashing a new wave of demand in the housing market. Lower borrowing costs will encourage many first-time homebuyers to take the plunge, strengthening the momentum in the affordable segment. Additionally, developers are likely to introduce more budget-friendly projects, ensuring a steady supply of quality homes tailored for the affordable segment," he said.