Housing has witnessed a downfall in sales for the first half of 2023 shrinking to 20 per cent, a report by Anarock revealed. The number also shows an 11 per cent decrease in the sales against the corresponding period of last year. A key reason behind this downfall is the increase in EMIs by 20% in the last two years.
Due to the higher rate of interest, low-income borrowers have been impacted the most leading to a dip in demand for affordable housing loans.
As per recent data analysed by SBI Research, home loans of up to Rs 30 lakh formed 45 per cent of loans disbursed between January and February. This figure is down from 60 per cent between April and June 2022.
The report also suggested that of approximately 2.29 lakh units sold across the top 7 cities in the first half of 2023, just 20 per cent or approx. 46,650 units were affordable homes.
Back in the first half of 2022, of approx. 1.84 lakh units sold, over 31% or approx. 57,060 units were in the affordable category.
How are interest rates pivotal?
Along with the rate of property, the interest rate provided by the bank also plays a key role in determining its sale.
Let us understand this with an example. Assume your loan eligibility was Rs 30 lakh last year with a rate of 6.5% provided by the bank. One year later, your income and eligibility haven’t changed but now the interest rate offered is 9%. Now, under this scenario, you can borrow only around Rs 25 lakh, which is 17% less than last year.
Also, the bank offers you the loan with two interest rate options – fixed rate or floating rate. If you opt for a floating rate of interest, the loan is associated with a Bank’s benchmark rate and moves according to the market interest rates.
If the base rate is revised in an upward or downward direction depending on market conditions, the floating interest rate will be revised accordingly.
The Reserve Bank of India has hiked the repo rate by 250 bps since May 2022 (from 4% to 6.5%) leading to an increase in the home loan rates as well.
20% increase in EMI
As per the report, an average EMI of approx Rs 22,700 was formulated for affordable housing in July 2021. This has now increased to Rs 27,300 which is up by Rs 4,600 per month.
“This 20% increase in the EMI has resulted in a jump of approximately Rs 11 lakh in the overall interest component – from Rs 24.5 lakh interest payable in 2021 to Rs 35.5 lakh today,” said Prashant Thakur, Regional Director & Head – Research, ANAROCK Group.
Till 2021, if a buyer seeks to buy a property worth under Rs 40 lakh, then for a tenure of 20 years, the buyer has to pay Rs 22,700 as EMI at an interest rate of around 6.7%.
Here, the total repayment to the bank was approx Rs 54.5 lakh, of which the interest component was approximately Rs 24.5 lakh.
Now in 2023, home loan interest rates hover at around 9.15%, and EMI is approx Rs 27,300 for the same amount of loan taken for the same tenure.
The total repayment to the bank at this rate is now Rs 65.5 lakh, of which the interest component will be Rs 35.5 lakh.