Realtors eye demand boost post RBI repo rate cut, but quick transmission will be key for borrowers

The Reserve Bank of India's monetary policy committee has finally cut the repo rate to 6.25 per cent from 6.50 per cent after leaving it unchanged for 11 consecutive times. It may just be 25 basis points to start with, but economists see a further cut in the next MPC meeting in April and beyond. This coupled with the recent income tax relief announced by Finance Minister Nirmala Sitharaman has spelt good news for the housing market. 

"In terms of the impact on the housing sector of the RBI's decision to reduce the repo rate by 25 bps, this piggybacks on the recent taxation benefits announced in the Union Budget. As such, it is undeniably a major boost to the homebuyers, particularly for affordable housing buyers," said Anuj Puri, chairman of real estate consultants Anarock.

The residential real estate market has seen strong momentum post-pandemic, but there have been signs of a slowdown in recent months. More importantly, demand in the affordable housing market has been tepid, even as sales in the premium and luxury segments have been brisk. 

Typically, buyers in the mid and affordable housing segments would be seeking a home loan to purchase properties and over the past 12-18 months, high interest rates have been a concern for them, especially given the rising realty prices.

According to Anarock, in 2024, average house prices rose anywhere between 13-30 per cent in the top seven cities in India. The average house price in the top seven cities has increased 21 per cent to around Rs 8,570 per square feet at the end of last year, from Rs 7,080 at the end of 2023. 

"Many first-time homebuyers who had been hesitating to take the plunge are likely to make their move now as home loan rates will reduce - as long as banks pass on the key benefits to buyers," said Puri.

That last bit about banks passing on the rate cut will be key here. Over the last few years, there has been a rising proportion of floating-rate home loans linked to an external benchmark like the repo. Such loans now account for almost 40 per cent of the total loan book. These loans typically move in tandem with the repo rate, up or down. So, borrowers who have such loans will see an immediate impact.

A quick calculation we did earlier shows, following the 25 bps rate reduction, the monthly EMI will reduce by around Rs 800 to about Rs 44,200 from Rs 45,000 for a loan of Rs 50 lakh at a 9 per cent rate of interest for 20 years. That is around Rs 9,600 less per year.

But, for loans that are not external benchmark linked, and are instead linked to a bank's MCLR (marginal cost of funds-based lending rate) or the prime lending rate of a housing finance company, the pass-through may not be as immediate as MCLR adjustments happen with a lag, point analysts. And that impacts housing finance companies too. 

According to Subhasri Narayanan, director at CRISIL, around 70 per cent of borrowings of housing finance companies are either on fixed rate or MCLR-linked. On the other hand, most of the loans disbursed by housing finance companies are floating. So, there could be some pressure on net interest margins there. 

"What could be a partial mitigant is that a substantial portion of the floating-rate loans disbursed by housing finance companies are linked to the prime lending rates. In the absence of a benefit on the borrowing cost side, prime lending rates may not see too much of a downward movement," said Narayanan. 

Rishi Anand, MD and CEO of Aadhar Housing Finance says the rate cut was much in line with expectations and would be a catalyst to growth enablers outlined in the Union Budget.

"The benefits of this rate cut will begin to accrue on an immediate basis and are expected to be fully realised in the next 3-6 months, benefiting customers," said Anand.