Data shows demand for home loans is slowing

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A spike in mortgage rates is starting to force at least some buyers out of the housing market, according to home loan data.

Outstanding loans for home purchases rose at their slowest sequential pace in 10 months in May, rising 0.15% to 17.1 trillion, according to data released last week by the Reserve Bank of India (RBI). June data will not be available until the end of this month. It was the first time in six months that the monthly growth rate slowed to less than 1%.

The growth rate of home loans peaked in March with an increase of 6.7% compared to the previous month. It has since slowed, falling to 1.3% in April.

A spike in inflation forced the Reserve Bank of India to raise the benchmark repo rate by 90 basis points in May and June. The rate hikes are aimed at further reducing demand and cooling prices in the economy. RBI is likely to continue raising rates as the inflation-adjusted or real interest rate remains in negative territory.

The repo rate, or the rate at which RBI lends money to commercial banks, stands at 4.9%, with retail inflation of 7.04% in May. Mortgages are largely indexed to the repo rate. With the rise in rates, demand for personal loans also moderated by around 170 basis points (bps) between March and May, while the overall drawdown of credit remained stable. As a result, the share of home loans in total loans fell slightly from 14.27% in April to 14.21% in May. Momentum also moderated slightly from a year ago. Growth in home loans was 13.75% in April and 13.71% in May. Growth in personal loans and aggregate bank credit jumped nearly 170 basis points and 100 basis points from a year earlier over the same period.

Meanwhile, measuring the impact of this transmission of rising rates on mortgage rates shows that the weighted average of regular commercial bank lending rates on new loans increased by 23 basis points between March and May.

Affordability has also fallen, showed a separate dataset from Knight Frank India, which tracks the equivalent monthly remittance-to-income ratio for an average household. Its proprietary Affordability Index for the six months ended June 30 shows that all markets saw declining affordability due to the recent rise in mortgage rates following rising repo rates. The affordability of buying a home decreased by 2% on average across all markets and the EMI charge increased by 6.97%.

“Housing affordability, due to the 90 basis point rise in home loan rates, has deteriorated over the past two months,” said Shishir Baijal, Chairman and Managing Director of Knight Frank India. “However, despite rising rates, markets remain largely affordable. This, coupled with the positive change in sentiments towards homeownership, we expect demand to remain unhindered with the momentum supported by latent demand on the market.

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