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MOSL: REAL ESTATE- Assessing the impact of rising interest rates on real estate demand

REAL ESTATE: Assessing the impact of rising interest rates on real estate demand

• Two interest rate hikes cycle over the last two decades – demand impact seen post 150bps hike
• Over the last two decades, the industry has experienced two interest rate hike cycles, both before and after the global financial crisis in 2008. (1) Between FY05 and FY08, the Reserve Bank of India (RBI) raised the repo-rate by 300bps to 9% in Jul’08 and (2) between Mar’09 and Mar’11, it was once again increased by 375bps to 8.75%.
• Although we did see an impact on residential demand as depicted in Exhibit 1, the impact was largely visible for rate hikes beyond 150bps.
• We are witnessing a similar trend this time with demand momentum continuing despite a 90bps hike in repo-rate. While the quantum of interest rate hikes from here-on is anybody’s guess but we continue to believe that mortgage rate beyond 8.5% will likely witness some push-out in housing demand.

Previous interest rate cycles were accompanied by sharp price hikes

• Both the previous instances of rate hikes were accompanied by a strong pricing cycle. As per National Housing Board (NHB), housing prices in top cities witnessed a cumulative 70% rise between CY04 and CY07 and the same rose by 25% over CY09-11, adding onto the increased EMI burden owing to rate hikes.
• Despite a sharp recovery in demand over the last two years, prices on a broader market basis has remained flat this time around, thereby limiting the impact on affordability.
• Further, in CY11, when demand declined due to rate hikes, absorption in each cities were average 1.6x higher than previous 12 quarter average suggesting peak of demand
• Currently, except for Mumbai and Pune where absorption were helped by low stamp duty rates, average volumes for other top cities are 1.2x of average volumes prior to Covid pandemic.