Realty sector cheers RBI rate hike pause; experts say affordable housing to get a boost

The Reserve Bank of India (RBI) on Thursday (April 6) hit a pause button on the repo rate hike in its first bi-monthly monetary policy meeting of the fiscal year 2023-24. It was a positive surprise as most analysts, economists, and market experts were expecting a 25-basis point (bps) rate hike.

Post the policy announcement, the benchmark indices were trading in the green and the biggest gains were seen in the realty stocks. At 1 pm, the S&P BSE Realty index traded 2.37 per cent higher at 3,218 levels.

Experts say that the RBI's move to keep the repo rate unchanged at 6.5 per cent, will help several sectors but the biggest beneficiary will be realty.

Here's how a pause in repo rate will boost the real estate sector

Repo rate and home loans have a correlation - when the RBI lowers the repo rate, the cost of borrowing for banks goes down. Conversely, home loan interest rates go up with the RBI making an upwards tweak in its lending rate.

As RBI has already hiked the rates six consecutive times since May 2022, cumulatively 250 bps, the pause comes as a relief to home loan borrowers and will boost the existing growth momentum in the housing sector. However, the RBI Governor mentioned in his speech that today's status quo was 'only a pause not a pivot'.

“From a real estate market perspective, the sector has weathered multiple home loan interest rate increases from a low of 6.5 per cent to 8.75 per cent, supported by favourable house purchase affordability and the strong desire towards home ownership. Therefore, a pause in any further rise in the lending rates should support the existing growth momentum in the housing sector," said Shishir Baijal- Chairman & Managing Director, Knight Frank India.

The RBI’s move to not hike the repo rate further will support economic growth, Baijal added.

"Much against general expectations, the RBI decided to keep the repo rates unchanged at 6.5 per cent today. This is indeed good for the residential real estate market, which faces a tough road ahead amid massive layoffs by large corporates the world over. India is not decoupled from global economic dynamics and their invariable impact on the housing uptake here. The RBI’s decision to keep the repo rates unchanged comes as a welcome respite to homebuyers," said Anuj Puri, Chairman of ANAROCK Group.

Puri added that the move particularly gives relief to affordable and mid-segment homebuyers as affordable housing has been under stress since the pandemic. This segment (units priced <INR 40 lakh) saw its overall sales share dip between 2019 and 2022 and further in Q1 2023. "ANAROCK Research indicates that back in 2019, out of the total sales of nearly 2,61,400 units across the top 7 cities nearly 38 per cent of sales were in the affordable segment," Puri said further.

Also Read: RBI MPC Meeting LIVE: Is another repo rate hike coming? Shaktikanta Das to reveal MPC's rate decision at 10 am today 

Echoing similar views, Y. Viswanatha Gowd, MD & CEO of LIC Housing Finance, said today’s move sends a positive signal and improves the sentiments. "We expect the real estate along with other sectors to build up on this as it has come at the beginning of the new financial year. The prospective homebuyers will now be encouraged to crystallise their buying decision.”

Gowd added that the RBI's decision may put to rest the anxiety amongst the borrowers that emanated with the EMI increase consequent to a series of repo rate hikes.

What is the correlation between the repo rate and home loan interest rate?

Just as borrowers have to pay interest to obtain credit from banks, financial entities also pay interest on funds borrowed from the central bank. This interest is known as the repo rate. So, if the repo rate is hiked, banks are expected to pass on this hike to consumers eventually, hence making the loans expensive.

Realty stocks climb on RBI’s decision

Nifty Realty— a 10-company index that reflects the behaviour and performance of Real Estate companies – was up over 3 per cent after RBI announced the decision to pause the repo rate hike.

Last seen on the NSE realty index, Godrej Properties was the top gainer which surged nearly 6 per cent, followed by DLF, Oberoi Realty, Macrotech Developer (Lodha), and India Bulls Real Estate each up over 3 per cent.

While Mahindra Lifespace Developers rose over 2 per cent, Prestige Estates, Sobha, and Brigade Enterprises, too, gained over 1 per cent. Phoenix Mills was trading up by 0.51 per cent.

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