Interest rates

Will rising input costs and interest rates affect the real estate recovery?


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The Indian real estate sector is heading towards normality. Fueled by attractive home loan rates and inventory availability, sales are now showing steady growth. In a recent interview, HDFC Chairman Deepak Parekh said he has not seen the demand for housing for the affordable and middle-income segments like it is today, in his 44 years. with the mortgage lender.

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In fact, according to real estate consultancy CBRE, home sales in the first three months of this year jumped nearly 40% year-on-year to more than 70,000 units.

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Another property consultant, Anarock, said home sales in the March quarter were at their highest level since 2015, with around 99,550 units sold across India’s seven major cities.

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Ravi Subramanian, MD and CEO of Shriram Housing Finance, said the demand for housing is immense in the affordable segment and the sector has barely scratched the surface.

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Data from Anarock shows that the unsold affordable housing stock has shrunk by 21% in two years to 1.86 lakh units.

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Meanwhile, home loans are expected to become more expensive. HDFC raised its retail prime rate (RPLR), on which its adjustable rate mortgages are referenced, by 5 basis points.

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This comes after many big banks, including the SBI, raised their marginal cost of funds-based lending rate (MCLR) by 5 to 10 basis points last month. An increase in the Reserve Bank of India’s repo rate is on the anvil, marking a turning point in the interest rate cycle.

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At the same time, builders have no choice but to pass on input cost inflation.

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Data shared by Macrotech shows that raw materials such as cement, steel and tiles saw year-over-year cost increases of up to 35.1%. However, the weighted impact is approximately 13.7%.

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While inventory prices have already increased by 6% in the last financial year, they are expected to rise another 6-8% this year, which is below the expected average wage growth of 10% in India, according to a survey. ‘Aon for fiscal year 23.

Rising average wages will allow real estate players to pass on rising costs to customers and preserve margins.

Macrotech Managing Director and CEO Abhishek Lodha on the fourth quarter earnings call said modest price growth actually bodes well for the sector as the company expects inflation is moderating.

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Talk to trade standard, Abhishek Lodha, MD and CEO of Macrotech Developers, says volumes dropped significantly when prices were flat in the pre-Covid years and rising prices are improving homebuyer sentiment. House price growth remaining below average wage growth will ensure affordability, he says.

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Experts also say the pandemic has helped shift consumer sentiment sharply toward homeownership and the work-from-home trend is driving demand for larger homes.

Vivek Rathi, research director at Knight Frank India, said the sustained momentum in sales after the third wave of coronavirus shows that the sector is under a new upward cycle.

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According to Prashant Thakur, Senior Director and Head of Research of ANAROCK Group, residential real estate has made a strong comeback after the second wave. Interest rates were at an all-time high and developers kept prices reasonable, he said. While he thinks buyers can absorb up to a 10% price hike, rising interest rates won’t be a big drag.

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Although high raw material costs and the ongoing war between Ukraine and Russia are likely to be a short-term drag, the industry believes that risks from rising inflation and mortgage rates are overestimated. All signals now suggest that residential real estate is headed for a structural growth cycle after years of downtrends.

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