RBI rate hike to test housing affordability, premium segment seen more resilient

The Reserve Bank of India’s move to raise the repo rate by 25 basis points and shift its policy stance to calibrated tightening is expected to have a measured impact on the housing market, with first-time and price-sensitive homebuyers, particularly in the affordable housing category, likely to be more sensitive to any further increase in borrowing costs.

The central bank on Wednesday raised the repo rate by 25 basis points to 5.5%, its first increase since February 2023, amid rising inflationary pressures. The move is expected to increase borrowing costs for banks and could translate into higher interest rates on floating-rate home loans as lenders transmit the increase.

The impact is likely to be more visible in the affordable and mid-income segments, and a rise in financing costs could lead some prospective buyers to defer purchases, opt for smaller homes or increase their down payments.


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“For real estate, the focus now will be on maintaining affordability, ensuring smooth transmission of rates and sustaining consumer confidence, especially during the ongoing festive and peak home-buying season…This can be effectively managed if the reform measures expected from both the central and state governments are accelerated, particularly faster and more predictable project approvals, GST rationalization, and enabling RBI-regulated lending for legitimate project-related premiums and instalment payments payable by developers,” said Kamlesh Thakur, President, NAREDCO Maharashtra.

The key factor for the residential market will be whether the rate hike is a one-off move or marks the beginning of a prolonged tightening cycle. A sustained rise in borrowing costs could have a more visible bearing on affordability, buyer sentiment and transaction volumes than a one-off 25-basis-point increase.

“We do expect that floating home rates will be repriced and higher construction costs will be passed onto the buyers, with mid-segment affordability likely to remain under the scanner. Demand fundamentals remain strong and a robust GDP growth, growing investments and a healthy construction sector likely to absorb the negative impact,” said Lata Pillai, Senior MD and Head - Capital Markets, India, JLL.

According to her, the pace and extent of any further rate hikes are likely to matter more to the overall market than a single 25 bps hike.

The lower end of the housing market has already been seeing some moderation in activity. In the first nine months of the year, sales of homes priced below Rs 50 lakhs stood at 47,660 units, declining 14% and accounting for 18% of total residential sales. The Rs 50 lakh-1 crore segment recorded sales of 69,380 units, down 5.9%, showed Knight Frank India data.

However, industry experts expect the overall housing market to remain relatively resilient, particularly at the premium end, where buyers are less dependent on mortgage financing. Strong income growth, household balance sheets and continued demand for quality housing could also cushion the impact.

For developers, higher interest rates could also increase the cost of construction and project financing, although strong housing demand and disciplined inventory levels may limit the impact on new project activity.