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Revival of India’s real estate sector – here’s why it needs an urgent rate cut

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Rising interest rates not only deterred potential buyers from resorting to loans, but also impacted developers’ cost of capital. Reducing repo rates would improve buyer sentiment and fuel home sales, writes Diwaker Bhalla, CEO and co-founder of PeProp.Money.

The property sector has faced a perfect storm with the lingering effects of the COVID-19 pandemic, rising interest rates and escalating commodity costs all together affecting an otherwise likely property boom in India. . India’s House Price Index (HPI) has jumped nearly 10% in the past three years amid the pandemic and high inflation and interest rates.

A key factor influencing sales is consumer sentiment; positive sentiments often lead to increased purchases, while negative sentiments deter potential buyers.

The RBI kept the benchmark interest rate at 6.5%, raising concerns in the rate-sensitive real estate sector. Although lending rates remain stable, continued increases of 250 basis points since May 2022 have weighed on the demand segment in major cities. In light of this situation, it is imperative that the Reserve Bank of India (RBI) take decisive action and cut interest rates, thereby reviving the property market and boosting economic growth.

Impact of RBI interest rate hikes on real estate

CREDAI has warned RBI that another rate hike will increase borrowing costs for developers, leading to even higher project spending and house prices. With prices having already risen 5-6% last year, this decision, combined with rising raw material costs, could reduce the already thin margins of real estate projects, making some developments financially unfeasible for developers.

Rising interest rates not only deterred potential buyers from resorting to loans, but also impacted developers’ cost of capital. Reducing repo rates would improve buyer sentiment and fuel home sales and help put more cash into consumers’ hands by encouraging them to buy homes.

Need to lower prices

A reduction in the pension rate should support robust GDP growth. Looking at the period between March 2021 and March 2022, with the repo rate hovering around 4-4.4%, India recorded GDP growth of 8.95%. To bring back the lost momentum in the property market, there is an urgent need for the RBI to cut interest rates. Lower rates may instill a renewed sense of confidence among consumers and developers, thereby stimulating animal spirits in the market.

Festival season – an opportune time

Rising interest rates have led to an increase in stalled projects, as developers struggle to secure financing amid rising investment costs. This has left home buyers waiting for the realization of their dream home. Lowering interest rates by the RBI can serve as a lifeline for stalled projects, making financing more accessible for developers to get back to work and fulfill buyers’ dreams.

Moreover, as the holiday season approaches, it presents a golden opportunity to invigorate the real estate market by combining attractive offers and reduced interest rates ahead of the holiday season. The festive season is traditionally seen as a prime time to buy property in India, the RBI can help builders tap into that sentiment and induce much needed momentum.

The author, Diwaker Bhalla, is CEO and co-founder of PeProp.Money. The opinions expressed are personal.

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