The Indian real estate market has seen a recent surge in interest, with many investors and developers looking to capitalize on the rising demand for residential properties. However, there are concerns about the impact of rising interest rates on home sales, and whether this could lead to a slowdown in the real estate market.
Recently, the Reserve Bank of India (RBI) decided not to hike interest rates, and this decision has been welcomed by many in the real estate industry. Listed realty companies have seen a significant uptick in their share prices, with many companies reporting gains of 3% to 6%.
Despite concerns about rising interest rates, recent housing sales data suggests that rising EMIs do not necessarily impact home sales. In fact, the housing market has recorded its highest-ever sales across the top seven cities, despite an 18%-20% increase in EMI. This suggests that other factors, such as economic growth and increasing demand for residential properties, are driving the market.
However, it is important to note that interest rates do have an impact on real estate sales. Low-interest rates usually translate into subdued home sales, while high-interest rates can dampen them. This is because home loans become more expensive, making it more difficult for buyers to afford properties.
The impact of interest rates on the real estate market varies depending on the type of property being sold. Affordable housing developers are likely to benefit from a pause in rate hikes, given the relatively higher proportion of dependence on financing by banks and NBFCs prevalent in the affordable segment. On the other hand, premium builders are experiencing more demand from customers who are either up-trading or engaged in formal economy, where salaries are high.
This reflects a K-shaped economic recovery, where affordable housing has no takers while premium commands the demand. Since 2017, developers have been focusing on the affordable segment, but its share of new launches has declined sharply since the start of the pandemic. Post-pandemic, the demand has been mainly driven by mid-economy and premium segments.
Realty stocks like Godrej Properties and Oberoi and Nifty Realty have rallied most of 2020 till about late 2021, as real estate sales showed marked improvement. This has been driven by increasing demand for residential properties, particularly in the mid-economy and premium segments.
Despite concerns about rising interest rates, recent housing sales data suggests that the real estate market is likely to continue to grow. However, it is important for investors and developers to be mindful of the impact of interest rates on home sales and to take a long-term view of the market.
In conclusion, the Indian real estate market is experiencing significant growth, driven by increasing demand for residential properties. While rising interest rates can impact home sales, recent data suggests that other factors, such as economic growth and changing consumer preferences, are likely to be more important drivers of the market. As such, investors and developers should continue to closely monitor the market and take a long-term view when making investment decisions.