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

Says rates are at historic lows now; a housing loan is a long-term loan during which rates move up and down and a customer who wants a house won't hold back just because they are rising currently

Deepak Parekh, Chairman, Housing Development Finance Corporation said a minor increase in interest rate is not going to impact home loan demand since rates are at historic lows.

Speaking at a CII event, the veteran banker said since a housing loan is a long-term loan during which interest rates move up and down and a customer who wants a house will not hold back because interest rates are going up.

The interest rate environment had remained benign for the last three years but there are indications that the cycle is turning now with some of the global central banks increasing rate. The Reserve Bank of India however has promised to continue its ultra loose stance till growth revives on a durable 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 if at all from hereon will be calibrated and non-disruptive,” Parekh said while commenting on whether home loans would be impacted if interest rates were to rise.

“The government has continued with the tax incentives on home loans which also helps reduce the effective rate paid on a home loan. The reason why this concern has arisen is that since banks have moved to the external benchmark or repo linked loans, there hasn’t been an upward increase in the benchmark policy rates so far,” he said.

According to Parekh, rise in interest rates will not be a dampener for home loans.  “Do remember, we have seen home loan rates as high as 17-18% in the past. Today, interest rates are still at historic lows, so a minor increase will not have an impact on the demand for home loans,” he said.

On whether housing prices are going to increase Parekh saidin certain high-end premium projects already seen a price rise of 15 to 20% though such hike is not the case across the board. 

“Barring a few metro cities, prices in the affordable housing segment have been stable.  The sweet spot for housing is still in the price range of Rs 5 million to Rs 10 million,” he said.

He said even if certain pockets across the country witness a small price uptick, this can be absorbed. 

“What one needs to closely watch out for is if there is a continued rise in the costs of building materials, which could get passed on to the homebuyer.  There are, however, measures that can lessen this impact such as facilitating shorter construction cycles, ensuring faster approvals and enabling credit input on goods and services tax for under construction properties.  This would particularly help affordable housing projects,” he said.

On demand for the commercial real estate sector in a post pandemic era, Parekh said the jury is still out on the work space – work from home, return to work or having a flexible work model going forward.  “Perhaps all three options may co-exist.  Yet, the broader point is that whatever be the chosen option, it remains a positive for the real estate sector,” he said.

According to Parekh, fresh supply of office space across the major metro cities is expected to be in the region of 45 million square feet this year and an estimated quarter of this new supply is already pre-leased.  This demand is largely coming from the IT, e-commerce and the professional services space. “Rentals have so far been fairly stable, but there could be a slight uptick in certain premium projects,” he added.