Simar Singh | 24 May 2022

Rising Interest rates: A Not So Major concern for the real estate sector

Rising Interest rates: A Not So Major concern for the real estate sector

Until recently, people were living in the dilemma that mortgage rates across economies were safe in the light of interest rates for quite some time. But now, the bubble of those homeowners has burst, and the reason behind it is the problematic inflation. Mortgage loans are of two forms, i.e., fixed-rate and adjustable-rate. You can make better mortgage decisions if you gain a better perspective of understanding the interest rates and the economic influences that will help you determine your future course. 

How is the interest rate determined?

The interest rate is charged by banks and is charged on top of the principal amount by the lender to a borrower for the use of the land. The interest rate is set by the country’s bank, and the interest rate increases at the time of inflation. If the inflation rate is higher, the interest rate increases the cost of debt. It discourages the borrowing process and slows consumer demand. In the case of low interest rates, the demand for property increases and drives up prices. Because of this reason, people tend to opt for a home loan, but a home loan at a high-interest rate could be very crucial to handle. 

Nevertheless, real estate investments have the characteristics of performing well in a rising interest rate environment. And that is why there is nothing to worry about the rising mortgage interest rates. It is mandatory for housing market people to understand the rising inflation rate. Inflation is a sudden increase in the prices of goods and services. The time when the price level rises, each unit of currency buys fewer products. The disruption caused by inflation forces people and firms to make less than optimal spending, saving and investment decisions. 

Real estate investment characteristics during inflation 

Owning real estate has numerous benefits during a period of high inflation. Buyers see the appreciation as the property values keep pace with the inflation. Less real estate development projects due to the increase in rising labour, material, and machinery lead to an increase in the price as well. If the housing development speed is slow in the market, the demand for existing property rises. In such conditions, landlords tend to increase the rent and generate higher revenue. 

The impact of rising interest rates on real estate

An increase in interest rates tends to increase the real estate cap rates. Therefore provide an opportunity for real estate investment trust to grow the assets under management. 

Is rising interest rates a blessing for real estate?

On April 8, the Reserve Bank of India (RBI) kept borrowing costs unchanged. Despite the fact that inflation is rising in the aftermath of Russia’s war with Ukraine. The interest rates for homebuyers and real estate developers are likely to be maintained by financial institutions. RBI will continue to accommodate the stance and the decision to maintain the repo rate at 4%. In this form, the liquidity in India will further boost the investor’s sentiments. With this continued current repo rate, the home loan rates in the market will remain low. The result of this will influence the market, and the buyer interest in the residential sector will continue to grow. 

The CEO and Managing and Marketing Development of Colliers India, Ramesh Nair, stated that the unchanged repo rate would provide sufficient space to move freely to homebuyers because the records of home loan rates are pretty minor. 

The real estate market of India is getting ready for an increase in the repo rates, but the currency hasn't happened to date, which shows a remarkable positive side for home loan borrowers. However, many others believe that the rising interest rate and the rise in construction costs in the recent past might pressure real estate developers and eventually impact residential sales. RBI rationalised the individual housing loans in Oct 2020 by linking them with a loan to value ratio of all new housing loans sanctioned up to March 31, 2022. The applicability of the LTV ratio is now extended till March 31, 2023 because of this increase in credit flow for housing loans. The demand catalyst, i.e. low home loan interest rate and housing loans risk weight guidelines has been extended to March 31, 2023. It will ensure speedy sales despite the brief upwards revision in the pricing of housing.

Read More: Top 6 Points That States Real Estate Is a Good Investment in India

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