State Bank of India (SBI), India's largest lender, has recently increased its home loan interest rates to a range of 7.50% to 8.70%, bucking the trend in a broader falling interest rate environment. This move is expected to have significant implications for the real estate sector, particularly affecting first-time homebuyers and potentially slowing down housing demand.

Impact on Homebuyers

Amit Mamgain, Director at Yugen Infra, provides insights into the potential consequences of this rate hike:

• Temporary Slowdown: The increase in home loan rates is likely to cause a temporary deceleration in housing demand.
• First-Time Buyers Most Affected: Those entering the property market for the first time are expected to be the most impacted, as they are typically more sensitive to changes in EMIs and overall affordability.
• Delayed Purchases: Prospective buyers may postpone their property purchases in response to the higher interest rates.
• Shift in Preferences: Some buyers might opt for lower budget segments or gravitate towards more affordable housing options.

Market Segment Analysis

The impact of SBI's rate hike is expected to vary across different segments of the real estate market:

Premium Housing

This segment, catering to better-financed buyers, is likely to remain relatively stable.

Mid-Income and Mass Housing

These segments are anticipated to face increased pressure, with:

• Slower conversion rates
• Extended decision-making cycles for potential buyers

Developers' Response

In light of these changes, real estate developers may need to adapt their strategies:

1. Increase Affordable Housing Stock: To cater to the shifting demand towards more affordable options.
2. Offer Smaller Functional Spaces: Providing compact yet practical living solutions.
3. Creative Payment Structures: Implementing innovative payment plans to attract buyers.
4. Pricing Adjustments: Developers might need to temper their pricing to accommodate the reduced loan eligibility of potential buyers.

The real estate sector is likely to experience a period of adjustment as both buyers and developers navigate the implications of SBI's home loan rate hike. While the premium segment may remain resilient, the mid-income and affordable housing segments could see significant shifts in demand and purchasing patterns.

The affordable housing segment in India is facing significant challenges as construction costs have surged by 40% over the past five years, according to recent data from ANAROCK Research. This dramatic increase in costs has led to a sharp decline in the availability and sales of affordable housing units across the country.

Declining Share of Affordable Housing

The impact of rising costs is clearly reflected in the market trends:

• New launches: The share of affordable housing in new launches has plummeted from 40% in 2019 to just 12% in the first half of 2023.
• Sales: The proportion of affordable housing in overall sales has dropped from 38% to 18% during the same period.

Key Drivers of Cost Increase

Several factors have contributed to the steep rise in construction costs:

1. Cement Prices: Despite a 15% correction last year, cement prices have increased by 30-57% over the past five years.
2. Steel Costs: Steel prices have climbed by 50% since 2019.
3. Copper Prices: A staggering 91% increase in copper prices has been observed.
4. Labor Costs: The most significant jump has been in labor costs, which have spiked by 150% since 2019, with a 25% increase in the past year alone.

City-wise Construction Costs

The cost of construction for affordable housing varies significantly across major Indian cities:

Impact on Pricing and Developers

The rising costs have put developers in a difficult position:

• Developers typically pass on 5-6% of cost increases to buyers through escalation clauses.
• Residential prices in metropolitan areas have been rising by 9-12% annually.
• Potential tariffs of 25-50% on imports could further increase construction costs by 1.5-5%.

Potential Relief on the Horizon

While the situation looks grim, there are some potential measures that could provide relief:

• Proposed GST reforms aim to reduce cement GST from 28% to 18%.
• Restoration of input tax credits is under consideration.
• These reforms could potentially provide a 2-4% price relief for affordable housing.

The affordable housing segment, once a booming part of India's real estate market, is now under severe pressure. As construction costs continue to rise, it remains to be seen how developers and policymakers will address this challenge to ensure housing remains accessible to a broader segment of the population.