Rate Hikes an Issue for Cost-Sensitive Indian Housing Market

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According to Ashutosh Limaye, Director of strategic consulting for Jones Lang LaSalle India, "It has always been axiomatic that when financial institutions raise their lending rates, there are bound to be ripples on the highly cost-sensitive Indian real estate market. The latest rate hike obviously means that  the cost of construction has gone up for developers, and this move by the RBI certainly does not come at the best of times for them. Banks have already taken a cautious approach to real estate lending and reduced their exposure to the sector, and most developers are now prevailed upon to raise a larger component of their construction costs from the private sector. The fact that such funds come at a higher cost of borrowing has already increased their construction costs significantly."

Limaye further commented, "It would be logical to assume that, hoping to maintain their profit margins under such circumstances, developers would not hesitate to mark the incremental burden to buyers. This would certainly happen if buyer sentiments and resultant market activity were high enough to accommodate such a move."

However, the market for residential real estate is far from effervescent at the moment. In a scenario where staying competitive and selling stock is of utmost essence, developers are unlikely to increase the cost of their units and thereby risk losing more customers. While this will certainly impact their revenues to an extent, most developers do see a sufficient profitability quotient to make a strategic decision on this count.

On the buyer side, the low-to-mid income segments are invariably the most affected by a hike in home loan interest rates. That said, the impact of increased cost of borrowing is not as severe as that of the decreased allowable percentage of borrowing. Where this used to be at a steady 85% of the overall cost of the property, most banks are not extending more than 75% now. The fact that the salaried class now have to supply a higher contribution to the cost of their homes is having a very tangible impact on demand", said Limaye.

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