How RBI Repo Rate Hikes Impact Home Loan EMIs, Housing Demand

The recent hike in repo rates by the Reserve Bank of India is expected to dent housing demand as equated monthly instalments rise, according to Knight Frank. But the impact won't be material.

The banks are following the central bank's lead by increasing interest rates on loans, after a cumulative repo rate hike of 90 basis points over May and June, ending record-low borrowing costs to cool inflation.

A 50-basis-point hike in home loan interest rates will raise EMIs by 3.84% and decrease the affordability by 1.11%, Knight Frank said in a note.

"Even while basis the home loan terms of individual home buyers, there will be varying level of lender response measures, the increase in repo rate earlier during May and now in June, will make EMIs costlier for buyers."

The real estate sector has been recovering after "surviving the worst of the pandemic". Annual residential sales in 2021 have reached withing striking distance of 2019 volumes and recent monthly sales trends also show a strong momentum, the report said. But rising rates could be a "significant headwind" to real estate demand.

According to the property consultant's note, the recent repo rate hikes increased EMIs by 6.97% across key markets, including Mumbai, Delhi-National Capital Region and Bengaluru.

While home loan rates are still 150 basis points below the pre-pandemic levels, a reversion to those levels will result in an 11.73% increase in the EMI load for the homebuyer, and an effective 3.38% decrease in affordability, based on the Knight Frank Affordability Index.

The analysis does not account for a change in income levels or house prices, and considers interest rates as the only variable, the note said.

"The RBI is likely to continue increasing the policy rate to narrow the gap between consumer inflation and repo rate and reduce extent of negative real interest rate in the economy, which still stands at -1.8%," the note said.

However, in "practical terms", such a hike in home loan rates will translate to an "increase in tenure" rather than an actual increase in EMI, "effectively subduing its impact to some extent", Knight Frank said.

The property consultant does not expect home loan rates reaching pre-pandemic levels to "subdue market momentum significantly".

Also Read: How RBI Repo Rate Hikes Will Impact Real Estate Stocks, According To Morgan Stanley

"As things stand currently, the RBI having kept the FY23 GDP growth estimate constant gives credence to our belief that residential demand should not be impacted materially in 2022."