Industry
Mint Primer: Why the RBI rate cut won’t help revive budget housing
Summary
- For there to be a meaningful impact on affordable housing, there needs to be another round of RBI rate cuts and more.
Affordable housing, the weakest link in the current real estate boom, may get a shot in the arm with the Reserve Bank of India’s (RBI) rate cut last week. However, for a meaningful impact, there needs to be another round of rate cuts and more. Mint explains why:
What was the RBI’s rate cut decision?
In the first rate cut in five years, the RBI on Friday slashed the repo rate by 25 basis points, taking the policy rate to 6.25%. The repo rate is the interest rate at which commercial banks borrow from the central bank. Home loan borrowers, who have taken floating-rate loans, would see their equated monthly instalments (EMIs) reduce when the benefit of a lower repo rate is passed on to consumers. This may be fully realized in the next three to six months, though it will begin to accrue immediately. The reduction in the benchmark rate is seen as the start of a rate-cut cycle.
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Does the rate cut benefit homebuyers?
It is a positive step. Reduced home loan rates can lift the overall sentiment. First-time homebuyers, who have been sitting on the fence due to high property prices and loan rates, may consider taking the plunge now, with lending rates expected to come down slightly, as long as banks pass on the benefit to the buyers in a timely manner. That said, the rate cut may be less effective due to rising property prices and high inflation. RBI’s decision to reduce the benchmark repo rate by 25 basis points also piggybacks on the recent taxation benefits announced in the Union Budget.
How has affordable housing fared amid the boom?
Record-breaking home sales in the last three years left out budget housing. The share of affordable homes, priced ₹40 lakh and below, in total sales has been steadily shrinking post pandemic.
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In contrast, the share of premium and luxury homes has risen. Homebuyers on a budget have few options today since most developers are focusing on premium projects.
What will make a meaningful impact?
A rate cut was definitely needed to lift sentiment and define a direction in the near future. Since the current cut of just 25 basis points may have a limited direct impact, a further cut of 25-50 basis points will be needed to make a real difference. That would give a stronger impetus to demand and help revive sales, particularly in the mid-income and affordable segments. Increasing home prices and elevated interest rates have hurt sales in the budget segment, which is more sensitive to such movements.
What more is needed to spur a recovery?
Besides the RBI’s rate cut and income tax relief, the second Special Window for Affordable and Mid-Income Housing (SWAMIH) fund could infuse more affordable housing supply. The ₹15,000 crore fund, which will help complete 100,000 homes in stalled projects, will offer relief to developers and buyers alike. But for developers, access to land at reasonable prices and credit availability for building budget homes are key asks. Lower land costs would mean better margins, spurring launches in the sub- ₹50 lakh segment.
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