After the impact of the second wave of COVID-19, recovery in the real estate segment has been encouraging
Activity in the real estate segment is an indicator of economic growth. After being battered by the second wave of COVID-19 that had brought the segment to a standstill, the recovery has been encouraging. Project launches, enquiries and sales have brought the smile back on builders’ faces.
The RBI has been holding the rates, refraining from making any changes. The repo rate continues to be comfortable at 4%. It is the rate at which banks borrow for the short term from RBI and also is the benchmark for deposit and subsequent lending rates.
The home loan rates are ruling at a decade low of 6.60% to 7.00% across key lenders. On a loan of ₹25 lakh for a period of 20 years at 6.70% interest rate, the EMI would be ₹19,000.
There are expectations that interest rates may be hiked in the near term to contain the rising inflation. Due to acute rise in prices of petrol-diesel, cooking gas, and groceries, the central bank may be forced to rise the repo rate that would lead to increase in interest rates.
This could be a cause of concern for the real estate segment and home loan borrowers.
The economic recovery is fully not factored in yet. Though Q1 (June 2021) GDP was reported at 20.10%, one should not get carried away with this number. The fall in the GDP previously was very high and even if the present growth numbers seem to be high, the economy is still far from real recovery.
Builders are facing high input costs that may force them to increase prices since such costs are always passed on to the buyers, but most builders are worried that such a move may curtail buying interest and impact sales. For buyers, increase in purchase cost and increase in interest rates could be a double whammy.
The government has been making every effort to provide the required impetus, and the liquidity booster measures have been quite encouraging. The affordable housing segment is expected to thrive with more bottom-of-the-pyramid buyers seeking houses.
Crucial factors
Three aspects would be crucial: COVID-19 third wave should not happen and even if it happens it should not be as severe as the second wave; repo rates should not be increased; there should be sharp recovery in the economy that would boost the confidence of buyers and home loan borrowers. A good economy offers confidence to people to go for their dream homes and take loans with self-assurance because of the certainty of being able to service the EMIs.
Borrowers should stick to floating rate option despite the threat of rising interest rates. The EMIs could go up if the rates get increased, but a growing economy cannot sustain high interest rates; the rates would eventually come down.