Indian house prices set to rise further despite high interest rates
Property prices in India are set to accelerate this year at a rate not seen in half a decade, according to a Reuters poll of property analysts who also warned that higher interest rates would reduce affordability, especially for first-time buyers.
A lack of demand has kept India’s property market relatively calm during the pandemic compared to other global markets which have soared as households rushed to buy more living space. These markets are now cooling off.
But the release of pent-up demand in India, as most workers return to their workplaces amid improving vaccination rates and fewer COVID-19 cases, has rattled the country’s housing market. Asia as well as a return of major institutional investors.
Home prices are expected to rise 7.5% nationwide this year, the fastest growth in five years, according to a May 11-27 Reuters poll of 13 property analysts, an upgrade from previous 5.0% expected in a March poll. Average house prices are expected to increase by 6.0% next year and in 2024.
The forecast comes despite expectations of sharply higher interest rates after the Reserve Bank of India surprised markets earlier this month with a 40 basis point hike in the repo rate to 4.40% and left hear that others would come soon.
“We are entering a period of price growth, driven in the short and short term due to rising input costs, and in the medium and long term with demand levels remaining strong and the existence of large players supported. by institutional money,” said Rohan Sharma, director of JLL Research.
Sharma said that with more rate hikes to come, “the window of opportunity for homebuyers to enter the market at current affordable (levels) will close over the next 2-3 quarters”.
More than 60% of respondents to an additional question in the survey, eight out of 13, said affordability for first-time homebuyers will deteriorate over the next two years. High house prices have led many first-time buyers to rent instead. But rents are also expected to become more expensive, according to a majority of respondents.
Vivek Rathi, research director at Knight Frank, estimates that for every one percentage point increase in the interest rate of a home loan, affordability is reduced by more than 7%.
Knight Frank, Colliers International, JLL Research, Liases Foras and TruBoard Partners all expect a significant slowdown in real estate activity if rates reach 6% or more.
At the same time, input costs for basic materials have risen dramatically in recent months around the world due to pandemic-related supply chain disruptions, compounded by the invasion of Ukraine by Russia in February.
There’s little reason to expect that trend to reverse anytime soon, meaning developers who absorbed those costs are now passing them on to buyers. It will also help push up house prices, analysts said.
“Improving demand and an increase in inflationary trends for basic raw materials in construction, including cement, steel and labor, are the main factors likely to push property prices north,” said Anuj Puri, President of ANAROCK Property Consultants.
The latest Reuters poll also showed house prices in India’s two most populous cities, Mumbai and Delhi, including the surrounding National Capital Region, will rise by 4-5% this year and the next year.
However, house prices in Bengaluru and Chennai, where analysts said houses are fairly priced, are expected to rise by 5.5-6.5% over the next two years.