Rising interest rates and inflation will affect growth of affordable HFCs: report
Rising interest rates, rising inflation and rising construction costs are expected to slow the growth of affordable housing finance companies in the current fiscal year, according to a report released Thursday.
Affordable housing finance (note size less than Rs 25 lakh) has proven to be one of the most resilient sectors to economic cycles and has seen rapid progress over the past decade, India Ratings and Research said. in a report.
With a compound annual growth rate of 25%, the affordable housing sector has outpaced the overall growth of the housing finance sector over the past five years.
However, some tailwinds that had buoyed the sector before appear to be easing and could therefore slow the pace of loan growth in the sector, he said.
“Rising interest rates, reduced cash flow from borrowers due to high inflation, rising cost of construction, resulting in both higher property costs and slower product launches. new inventory, and the discontinuation of the government’s credit-linked subsidy program (CLSS) are some of the challenges facing this segment,” the agency said.
The interest rate scenario has reversed, and most recently the Reserve Bank of India (RBI) raised repo rates by 90 basis points (bps), leaving the repo rate just 25 bps below the levels. ‘before Covid.
The agency said that a 100 basis point increase in interest rates leads to an increase in borrowers’ home loan EMI from 6.1 to 6.4% overall, while for a housing borrower affordable, the EMI of the loans increases by around 5.3%.
If the interest rate cycle continues to rise, a 200 basis point increase could raise the EMI in the range of 10.8-13%, he said.
“While for existing borrowers, lenders may cushion the impact of rising interest rates by extending the term initially. However, for new customers, the increase in EMIs would be immediate, which would negatively impact their mid-term home buying sentiments,” it said.
The report indicates that construction costs for the housing sector have risen sharply with a sharp increase in the prices of various raw materials, including cement, steel and concrete, as well as higher labor costs. .
This has resulted in an increase of 20-25% in key markets from a base construction cost of Rs 2,000-2,500 per sq ft as seen in 2019 leading to pressure on margins for contractors. developers, he said.
Although developers have not been able to pass on the full cost increase, there remains short to medium term upward pressure on house prices for buyers.
“The high inflationary environment, coupled with high interest rates, is likely to affect the accessibility of loans for new home buyers, which could lead to slower growth in assets under management (AUM) for real estate financiers due to a moderation in disbursements,” the agency said.
The agency further said it expects the housing finance industry to see 13% year-on-year growth in FY23, with affordable housing finance growing 16 to 18%.
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