Interest rates are rising and investors in real estate stocks are volatile. History shows that when interest rates are high, sales are hit. An analysis by Motilal Oswal Financial Services Ltd showed that residential real estate sales were hit by a hike of over 150 basis points (bps). One basis point is 0.01%.
The domestic broking firm reported in its June 27 AA report that the Reserve Bank of India (RBI) raised the repo-rate in July 2008 by 300 bps from FY05 to 9%. Repo rate is the rate at which RBI lends to commercial banks. In addition, between March 2009 and March 2011, rates were increased by 375 bps to 8.75%. This affected the demand for housing.
see full image
RBI’s latest rate hike cycle began in May 2022 and as of now, it has increased the repo rate by 90 bps to 4.90%. Since retail inflation is still high, rates are likely to go up further. Apart from costly home loans, recent price hikes by real estate companies may prompt customers to delay their home buying decisions.
The Motilal Oswal report highlights that there was a strong pricing cycle with both previous instances of rate hikes. “According to the National Housing Board, housing prices in top cities saw a cumulative increase of 70% between CY04 and CY07 and 25% as compared to CY09-11, increasing the EMI burden,” the report said. EMI is Equated Monthly Installment. Analysts said the latest management comments by listed real estate developers indicate that construction costs have increased by 10-15%, following which real estate developers have increased prices by 5-8% on select projects.
“Residential prices have increased in H1 2022 and will have an impact on overall affordability. Apart from home loans, home prices and homebuyer income levels are also important factors that determine affordability,” said Yashwin Bangera, Vice President, Research, Knight Frank India. Homes effective in May and June, Bangera said. The loan rate has increased by 90 bps. By 2022, Knight Frank will lead to an average decline of 2% in the Affordability Index across all markets and a 6.97% increase in EMI load.
According to IIFL Securities Ltd, in FY22, leading listed developers posted pre-sales growth of 47% year-on-year, For FY23, realty developers expect strong sales to continue, but analysts say That there may be a slowdown as there is an increase in capacity. Beat. The Nifty Realty Index has fallen 20% this calendar year and appears to be under pressure. The ongoing consolidation will help garner market share for large developers, but new launches and pre-sale momentum remain a key trigger for real estate stocks.