Minor rise in interest rates won't impact home loan demand: Deepak Parekh

 Because interest rates are at record lows, said Deepak Parekh, Chairman of the Housing Development Finance Corporation, a modest increase in interest rates will have little effect on home loan demand.

The seasoned banker remarked at a CII event that because a housing loan is a long-term loan with fluctuating interest rates, a customer who wants to buy a property will not wait because interest rates are rising.

For the past three years, the interest rate environment has been benign, but there are signs that the cycle is shifting now, with some global central banks raising rates. The Reserve Bank of India, on the other hand, has stated that it will maintain its ultra-loose monetary policy until growth resumes on a long-term and sustainable basis.

"Clearly, we are at the bottom of the interest rate cycle, but there is sufficient confidence in the central bank that any increase in interest rates from hereon, if at all, will be calibrated and non-disruptive," Parekh said when asked if rising interest rates would affect house loans.

"The government has maintained its home loan tax advantages, which help to lower the effective rate paid on a house loan." The reason for this fear is that there hasn't been an upward increase in benchmark policy rates since banks switched to external benchmark or repo linked loans," he explained.

A hike in interest rates, according to Parekh, will not be a deterrent to house loans. "Keep in mind that we've seen house loan rates as high as 17-18% in the past." Interest rates are still at record lows, so even a small increase will not affect demand for home loans," he said.

In response to the question of whether home costs will rise, Parekh stated that certain high-end premium projects have already witnessed a price increase of 15 to 20%, however this is not the case across the board.

"Prices in the affordable housing market have remained consistent, with the exception of a few metro cities." "The sweet spot for houses remains in the Rs 5 million to Rs 10 million price bracket," he said.

Even if there is a modest price increase in some areas of the country, he believes it can be absorbed.

"One thing to keep an eye on is if the cost of building materials continues to climb, as this could be passed on to the homeowner." There are, however, steps that may be taken to mitigate the damage, such as supporting shorter construction cycles, assuring faster approvals, and allowing credit input on goods and services tax for under construction properties. "This would be especially beneficial to affordable housing projects," he stated.

In terms of post-pandemic demand for commercial real estate, Parekh says the judgement is still out on whether people will work from home, return to work, or adopt a flexible work paradigm in the future. "Perhaps all three possibilities can coexist." "However, the overall idea is that whatever alternative is chosen, it is excellent for the real estate sector," he said.

According to Parekh, this year's fresh supply of office space in major metro areas is likely to be in the neighbourhood of 45 million square feet, with around a quarter of that already pre-leased. This demand is mostly driven by the IT, e-commerce, and professional services industries. "Rentals have remained quite stable thus far," he noted, "although there could be a tiny bump in select premium developments."

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