Will a rise in input cost and interest rates hit real estate recovery?

The Indian real estate sector is headed for normalcy. Fuelled by attractive home loan rates and availability of inventory, sales are now showing a consistent growth. In a recent interview, HDFC Chairman Deepak Parekh said he has not seen housing demand for affordable and mid-income segments the way it is today, in his 44 years with the mortgage lender. 

In fact, according to real estate consulting firm CBRE, housing sales in the first three months of this year jumped almost 40% year-on-year to more than 70,000 units.

Another property consultant, Anarock, reported housing sales in the March quarter were at their highest level since 2015, with approximately 99,550 units sold across the top seven cities of India. 

Ravi Subramanian, MD & CEO of Shriram Housing Finance said the demand for housing is immense in the affordable segment and the sector has barely scratched the surface.

Anarock data shows that unsold affordable housing stock declined 21% in two years to 1.86 lakh units. 

Meanwhile, home loans are set to get costlier. HDFC increased its retail prime lending rate (RPLR), on which its adjustable-rate home loans are benchmarked, by 5 basis points.

This comes after many large banks, including the SBI increased their marginal cost of funds-based lending rate (MCLR) by 5-10 basis points last month. An increase in the Reserve Bank of India’s repo rate is on the anvil, marking a turn in the interest rate cycle. 

At the same time, builders have no option but to pass on the input cost inflation.  

Data shared by Macrotech shows that commodities like cement, steel and tiles have seen year-on-year cost escalation of as much as 35.1%. However, the weighted impact is about 13.7%.

While inventory prices have already gone up by 6% last fiscal, they are set to rise another 6-8% this year, which is below the expected average wage growth of 10% in India, based on a survey by Aon for FY23. 

The rise in average wages will enable real estate players to pass on the cost increase to customers and maintain margins. 

Macrotech’s MD and CEO Abhishek Lodha, at the fourth-quarter earnings call, said that modest price growth in fact bodes well for the sector as the company expects inflation to moderate.

Speaking to Business Standard, Abhishek Lodha, MD and CEO, Macrotech Developers, says volumes fell significantly when prices were flat in pre-Covid years and price growth is improving sentiment among home buyers. Realty price growth staying below the average wage growth will ensure affordability, he says. 

Experts also indicate that the pandemic helped shift consumer sentiment heavily toward homeownership and the Work-From-Home trend is boosting demand for larger homes.

Vivek Rathi, director of research at Knight Frank India, said that the sustained sales momentum post the third coronavirus wave shows the sector is under a new upcycle.

According to Prashant Thakur, Sr Director & Head - Research, ANAROCK Group, residential real estate made a strong comeback after second wave. Interest rates were at record low and developers kept prices at a reasonable level, he says. While he believes buyers can absorb price hike of up to 10%, interest rates inching up will not be a big dampener. 

While high raw material costs and the ongoing Ukraine-Russia war are likely to be a near-term damper, the industry estimates that the risks due to rising inflation and mortgage rates are overstated. All signals now suggest that residential real estate is heading for a structural growth cycle after years of downtrend.