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The real estate sector has welcomed the Reserve Bank of India’s decision to keep the repo rates unchanged at 6.5%, saying that the move provides much-needed relief to homebuyers and helps them to continue enjoying low-interest rates.
Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. An increase in repo rate acts as a disincentive for banks to borrow from the central bank, ultimately reducing the money supply in the economy and thus helps in arresting inflation.
Since May 2022, Repo rate has increased by 2.5% cumulatively. This has dented demand sentiment in the sector. The rise in rates has hit the affordable segment the hardest followed by the middle-income segment, which is the most reliant on home loans. Home loans are a long-term commitment and even a small reduction in the interest rate can translate into significant savings over the loan tenure.
Higher rates in the economy have a two-fold impact. While it makes home loans costlier for retail borrowers, it makes loans costly for real estate developers too, increasing their finance costs and affecting their profitability margins. To protect their margins, they will have to increase home prices.
With the present decision of the RBI to keep the interest rates stable, the prospective homebuyers may find it easier to plan their decisions without the threat of rate increases. This is expected to maintain the ongoing momentum in housing registrations in the final month of the year. Going forward, one may expect momentum in housing sales to continue because of the unchanged repo rates combined with the resultant stable home loan rates and positive economic outlook on India.
From a borrowing cost perspective, this move ensures that homebuyers equated monthly instalments (EMIs) don’t increase whereas for developers, it doesn’t increase their financial burden as the cost of capital remains consistent.
If we consider the present trends, the housing market is in a boom phase and unchanged home loan rates will only add to the overall positive consumer sentiments. This will aid a stronger 2023 with sales expected to be higher by 20-30% compared to 2022.
Some developers were of the opinion that a rate cut would have been more beneficial. A key factor in the revival in residential demand just after the onset of the Covid-19 pandemic was the low-interest rate in the economy making homeownership affordable. While demand in the segment is still continuing, a persistent high-interest rate regime could have an adverse impact on buyer sentiment.
But with inflation still above 5%, uncertainties about a normal monsoon and the geo-political tensions persisting, there is only a slight chance of a rate cut in FY24.
Sandeep Runwal, President of National Real Estate Development Council, Maharashtra said that a reduction in repo rates, would “help improve home buyer sentiment and fuel home sales.” He added that it would put more money into the hands of consumers encouraging them to buy homes.
JLL estimated that healthy macroeconomic fundamentals and some normality in the global economy next year is likely to support a repo rate reduction. A rate reduction would translate into a decline in home loan interest rates which will improve affordability levels and provide a fillip to the market with sales expected to surpass the 300,000 units mark in 2024, as per Samantak Das, Chief Economist and Head of Research & REIS, JLL India.
In recent years, there has been a significant increase in real estate investments, driven largely by its ability to provide investors with substantial returns on their capital and its rising appeal as an asset class in comparison to alternative investment options. This decision is likely to encourage prospective homebuyers to proceed with finalizing their property investments.
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