Fall in Interest Rates to Fire Up the Housing Sector
Authored by Ravi Subramanian, MD and CEO of Shriram Housing Finance Ltd
April-June 2023 has turned out to be much better months than expected, from the point of prospective buyers of homes, cars and other consumer durables as inflation has eased off considerably. The WPI-based inflation in April fell into the negative territory for the first time since July 2020 and CPI inflation eased to a year-and-a-half low of 4.7 per cent, however higher than the central bank’s tolerance limit. The ‘hawkish pause’ breeds hope of an ‘extended pause’ in 2023 and possibilities of a ‘cut’ in interest rates in early 2024.
With the interest rates stabilising, if not reducing, domestic demand for various goods such as homes, cars and consumer durables is set to jump manifold in the rest of 2023. Even with the rising rates, the demand for such items was strong in the past fiscal year. Global real estate consultant JLL’s latest report confirms that “in 2022, the residential sector witnessed a robust demand revival with the year registering a decadal high home sales numbers with 2,15,000 units across the top seven cities (Mumbai, Delhi NCR, Bengaluru, Hyderabad, Chennai, Kolkata, and Pune).”
The latest Knight Frank ‘India Real Estate’ report also states that Indian real estate witnessed steady demand during the January-March period of this calendar year with housing sales rising 1 per cent and gross office space leasing growing 5 per cent year-on-year across eight major cities. According to PropEquity, a real estate analytics platform, housing sales in the top 14 cities rose 7 per cent in Q1CY23. These sales numbers are significant in the context of several adverse factors like rising interest rates, high property prices and global headwinds.
Another factor that led to this strong recovery in housing sales is the huge pent-up demand, accumulated during the Covid-hit years, which finally came to fruition in the past quarters. Also, the surging interest rates have had no major deterrent effect because the home buyers realised that there won’t be any work around the rising interest rate regime any time soon as all the major central banks were on the path of monetary tightening.
Evidently, the domestic housing demand recorded an all-time high in FY23 with the highest number of houses sold in the March quarter (Q4) in the past 10 years. Even if interest rates come down a tad, it will be a boon for the residential realty sector, especially the affordable housing segment. Home loan demand is expected to jump further as the investors still prefer assets like gold and realty, among others, as safe haven assets amid volatility in the capital markets. Subsequently, demand for other retail loans will also get a leg up.
The country’s optimistic growth outlook, a stable job market and the with the government announcing employment boosting initiatives will all also drive the housing demand in the coming quarters. Though the World Bank has revised its FY24 GDP forecast to 6.3 per cent from 6.6 per cent (in December 2022) the growth is expected to be much higher than other emerging economies. Recently, the global rating agency Fitch reiterated India’s growth prospects, saying the country “would be one of the fastest-growing sovereigns globally” with a 6 per cent GDP growth forecast for FY24. Unlike many developed nations, the country is not staring at unbridled inflation or massive job cuts, not even in the US-centric IT sector. Other favourable factors are the signs of a soft landing in the US economy and the fading away of recession fears.
The realty market is also expected to sustain its growth momentum in the current year. Interest rates are still in a comfort zone of below 10% and the momentum in the real estate sector is likely to continue this year. In all probability, the RBI will start reducing rates by early next year, which will further ease the borrowers’ interest burden. We expect robust consumer confidence, supported by a rise in income levels, sustained inclination towards house ownership since the pandemic, and falling interest rates to fire up the housing sector.
Disclaimer: This opinions expressed above are personal and may not reflect the views of DSIJ.