IMPACT ON AFFORDABLE HOUSING BUYERS OF RISING HOME LOAN RATE

Rising home loan rates have negative implications for the recipients of affordable housing initiatives as they increase overall costs of the project. Since affordable housing is viewed as a driving force of the Indian economy, stable interest rates would incentivise the real estate sector to focus more on affordable housing projects. 

The notable surge in demand for affordable housing can be attributed, in part, to the historically low interest rates. Moreover, the affordable housing sector has received significant encouragement for both developers and homeowners in the form of infrastructure status in the 2017-18 Union Budget and a reduced GST rate of 1% for such projects.

The availability of affordable financing and accommodative policies played a pivotal role in driving strong growth in sales and launches of affordable housing. However, the recent rate hikes have effectively eliminated this incentive. As a result, developers are likely to experience an increase in borrowing costs which could adversely affect the market as potential buyers may perceive this as a reason to delay their purchasing decisions.

The increase in home loan rates experienced some relief courtesy of the RBI's 2022 resolution to expand the individual housing loan ceiling for cooperative banks by 100%. This strategic maneuver is anticipated to generate a boost in demand within the affordable housing sector, as a wider array of credit facilities will be accessible to the lower and middle-income groups. This development is also a confirmation of the pivotal role played by cooperative banks in fostering inclusive growth throughout India.

The importance of affordable housing cannot be overstated, as it caters to the largest demographic segment in India. Such housing options not only stimulate interest among potential buyers but also broaden the scope of the market. The increased migration to urban centres emphasises the pivotal role of affordable housing in the development of tier 2 and tier 3 cities, thereby fuelling local economies.