RBI rate hike to put homebuyers off in Mumbai

Will there be a slowdown in the real estate market? Will property prices crash?

These questions plagued experts and homebuyers after the Reserve Bank of India (RBI) on Tuesday decided to hike lending and borrowing rates by 50 basis points.

This might result in developers pressing the panic button and start disposing of flats in their remaining inventory to pay off mounting debts and interest.

“High volumes of houses on sale will decrease property rates in the city. But, if developers do not succumb to the RBI's pressure, property rates may rise again,” said a real estate expert. 

This is the 11th repo rate hike in the last 16 months to tame the high inflation.

“Bankers will increase key policy rates that will have an impact on the interest rates on various loans. So, if person has taken a loan of Rs10 lakh, the EMI will additionally increase by Rs350,” said Paras Gundecha, president of the Maharashtra Chamber of Housing Industry. “Moreover, the civic corporation recently increased 100% premium of the use of additional floor space index. As borrowers, developers also have to pay high interest rates to banks. This load will be passed on to the buyers.”
“Banks should absorb the current RBI hike to reduce the burden on homebuyers,” he suggested.

Pranay Vakil, chairman of Knight Frank, India, feels the RBI’s base rate hike will impact both current and prospective buyers.

“The cost of construction has increased after steel and cement prices jumped by almost 20%. For developers, borrowing will become expensive and they will have little choice. They have to dispose all remaining inventory early to repay loans and mounting interest. The hike might force them to decrease property rate to pay the loan. If it happens then the RBI has achieved its objective,” explained Vakil.

But, he also pointed out that during the earlier base rate hikes, developers were not compelled to reduce property rates. “We have little hope from this hike too. Rather than tackling the root of the disease, the authority is wasting time treating the symptoms.”

Anurag Mathur, managing director of Cushman & Wakefield India, said the repo rate hike was unexpected. “It will weigh down demand in the residential segment. The change in the rates will negatively affect the end users capacity to raise debt. Banks will hike their interest rates on home loans and other loan products," he said.

“Higher rate of interest will lead to market stagnation and in some micro markets that are largely driven by end users, moderate correction in values as well. Capital values, however, will largely continue to hold steady for the next quarter or two,” predicted Mathur.