With the stage set for a hike in interest rates, the property market is likely to see a further slowdown. The Reserve Bank of India on Wednesday announced a 0.25 percentage point hike in repo rate, the rate at which it lends to banks, to 8 per cent up from 7.75 per cent earlier.

This makes a hike in banks’ lending rates inevitable. Developers and property buyers are bound to feel the pinch of this hike, which comes at a time when the sales are slow and buyers are resisting the steep increase in the cost of owning a home.

Developers, on their part, are blaming the price increase on the costs of construction driven by the increase in price of cement, steel, fuel and labour. Buyers and sellers will have to simply face this rough patch, which is unlikely to change over the next six months to one year. The general feeling appears to be that it could only get worse.

The hike in lending rates by the banks would affect the bottom line of developers directly and the affordability for the property buyer. One silver-lining is that the market slowdown is expected to result in a faster correction in property prices, which has been happening across all urban centres.

For the existing borrowers on floating rates, the concern is not much about an increase in monthly outgo. A hike, if any, in home loan rates is expected to be in the range of 0.25-0.50 percentage points. Industry experts point out that this effectively means for long tenor loans the EMI per lakh rupees which now is a few rupees short of Rs 1,000 would go up by Rs 20-25 — so for someone paying back a loan of Rs 35-40 lakh, the interest hike would be less than Rs 1,000 a month. The EMI will not increase but the tenor of loan will.

But for those planning to buy a property and looking for a similar level of loan, such a hike means that the borrowers’ eligibility is set higher — by about Rs 1 lakh more on the margin the buyer has to bring in. It reduces their affordability, which is likely to make them put off plans of buying a house for now. Particularly, with salaries in the IT sector stagnating, this would mean a significant slowdown in sales.

For most large developers, particularly those with high unsold stocks of residential units and office space, a hike in interest rates would mean a direct negative impact on their bottom line. With reports of huge stocks of unsold non-SEZ IT space and prospects of making a sale bleak, the developers are in for a beating. They are affected when the cost of funds goes up as they have borrowed 40-50 per cent of their prospective income from lease or sales. Servicing the term loans becomes difficult when they are left without revenue from lease or sales.

Also, the developers who have leased space are losing tenants because of the slowdown in IT — people are shifting to smaller towns or are consolidating and cutting back on leased space. This only adds to the developers’ stock of space that is not generating income.

The overall pessimism in the market has also forced some of the developers who had planned on raising funds from the capital market to put their plans on hold.

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