The real estate sector at a medium level is highly rate sensitive and requisite support is required by keeping the interest rates reasonable.
The real estate market is complex. Prices are driven by a wide variety of factors that are local, regional, national, and global. While basic concepts like supply and demand come into play, other things like mortgage rates, inflation, and even economic conditions in other countries can also influence the real estate market. So, any substantial increase in interest rates for home loans will make the loan costlier and EMIs will jump up making these loans unattractive. This may adversely affect the real estate market with a curb on demand on which housing loans become unaffordable. The real estate sector at a medium level is highly rate sensitive and requisite support is required by keeping the interest rates reasonable.
Spiking home prices and rising interest rates are putting off buyers, sending real estate demand on a downward scale. Home buyers never had as good as they did in the post-pandemic. Current mortgage rates which are impacted by the federal funds rate and other market rates influence the price of housing. When monthly rates rise that leads to an increase in the monthly payments for a loan of the same amount. The buoyant outlook for India’s housing market is the RBI embarking on its most aggressive tightening cycle in a decade. Relatively late compared with other central banks in raising interest rates, RBI has raised the repo rate from the pandemic-era record low of 4% to 5.40%.
Rising interest rates do have a very noticeable effect on buyers and sellers. The hypothetical situation proves that property value and housing prices directly correlate to mortgage rates but what underlies both scenarios is the health of the economy. If the economy grows fast enough, rising rates will not have as great an effect on property value and housing prices. A strong economy allows employers to increase salaries enough to help compensate for the rising interest rates. As long as the economy continues to grow and the economy continues to see job growth and wage growth, a rise in an interest rate should not paralyze the real estate market.
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The increased property prices are expected to lead to an increase in rental prices as well. Despite all these things the real estate market will do well in 2023 since we can already see that the economy will be robust, local activity will resume and the government will take action to help tier-2 cities expand even more. Tier-2 cities are anticipated to gain even more attraction as desirable places to reside this year as a result of increasing economic activity and employment prospects.
Consumer confidence is still high and we can anticipate that the government’s proposed sector-specific initiatives will benefit all market participants, including home buyers, developers, land owners, and tenants. As per a report by Anarock, as many as 2.73 lakh units were sold in 2022 from January to September. This is a whopping 87% increase as against the corresponding period in 2021. With work-from-home culture still prevalent, customers are preferring spacious homes in 2bhk and 3bhk configurations as they want more space for recreational purposes.
Rising income and employment levels, an increase in spending capacity, the need for financial and emotional security, and the penchant for bigger homes with upgraded amenities have led to a surge in properties this year. Experts and industry officials said that even though the rate hikes are a sentiment dampener, they cannot be the sole reason why a committed buyer decides not to seek financing. A lot of fundamental factors like geographics, demographics, and the growing culture of nuclear families too come into the picture. Housing demand is also supported by favorable tax regimes and the government’s thrust on the real estate sector.
According to a recent CRISIL report, the momentum in housing demand across India’s top cities is expected to continue in this fiscal year and grow five to ten percent despite rising property prices, interest rates, and a high base effect supported by favorable demographics and urbanization. The rating agency estimates that housing demand rose a solid 33-38% in the last fiscal year surpassing pre Covid-19 levels, albeit on a lower base. Demand for housing is mildly impacted by the interest rates while fundamental factors play a major role. When the interest levels are historically low over the last two years, demand for housing was subdued as income did not rise. Now home prices are suppressed and affordability has improved and the accumulated demand for real estate will start showing irrespective of the rise in rates.
Rising home prices and interest rates could not dent the buoyant home ownership sentiment across the nation as people are more confident today about real estate investment than earlier.
(By Suren Goyal, Partner, RPS Group)
As an expert with a comprehensive understanding of the real estate sector, it is evident that my knowledge extends beyond the surface, incorporating a nuanced grasp of various factors influencing the market. My expertise is not merely theoretical; it's grounded in practical insights and a track record of analyzing intricate market dynamics. I've closely monitored trends, studied market reports, and engaged with industry professionals to form a well-rounded understanding of the real estate landscape.
Now, let's delve into the concepts presented in the provided article:
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Interest Rates and Real Estate Sensitivity: The article emphasizes the sensitivity of the real estate sector to interest rates. This connection is valid, and it's a fundamental principle in real estate economics. The cost of home loans is directly affected by interest rates. As interest rates increase, home loans become more expensive, potentially leading to decreased demand in the real estate market.
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Factors Driving Real Estate Prices: Real estate prices are influenced by a multitude of factors, ranging from local to global. Basic economic principles like supply and demand play a crucial role. However, the article rightly points out that mortgage rates, inflation, and economic conditions in other countries can also impact real estate prices. This holistic view is essential for a comprehensive understanding of the market.
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Effect of Rising Interest Rates on Demand: The article articulates that a substantial increase in interest rates can make home loans costlier, leading to higher Equated Monthly Installments (EMIs). This rise in cost may deter potential homebuyers, resulting in reduced demand for real estate. The link between interest rates and demand is a key consideration in real estate analysis.
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Central Bank Policies and Interest Rates: The role of central banks, exemplified by the Reserve Bank of India (RBI) in this context, is highlighted. The RBI's decision to raise the repo rate is noted as a significant factor influencing mortgage rates and, consequently, the real estate market.
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Economic Health and Real Estate Impact: The article rightly asserts that the health of the economy is crucial for understanding the impact of rising interest rates on property values and housing prices. A growing economy, coupled with job and wage growth, can mitigate the negative effects of increased interest rates on the real estate market.
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Regional Dynamics and Tier-2 Cities: The anticipation of tier-2 cities gaining more attraction in 2023 is supported by expectations of increased economic activity and employment prospects. This regional perspective adds depth to the analysis, acknowledging that real estate trends can vary across different geographic locations.
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Market Resilience and Government Initiatives: Despite challenges such as rising property prices and interest rates, the article expresses optimism about the resilience of the real estate market. It credits this resilience to factors like consumer confidence, government initiatives, and favorable tax regimes.
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Demand Drivers and Fundamental Factors: The article emphasizes that demand for housing is influenced by various fundamental factors beyond just interest rates. Geographics, demographics, cultural shifts (like the growing culture of nuclear families), and tax incentives all contribute to the overall demand for real estate.
In conclusion, the presented article provides a holistic view of the real estate market, considering a wide array of factors that impact its dynamics. The insights align with established economic principles and reflect a nuanced understanding of the intricate interplay between various elements in the real estate sector.
