The high inflationary environment, coupled with high interest rates, is likely to affect the affordability for new home buyers, which could lead to a slowdown in assets under management growth for home financiers due to a moderation in disbursements, according to India Ratings (Ind-Ra).
In its Housing Finance Outlook for FY23, Ind-Ra expects the overall sector to grow around 13 per cent year-on-year (yoy) with a higher growth rate for the affordable housing finance segment
While developers have not been able to pass on the complete cost increase, there remains a near- to medium-term upward pressure on real estate prices for buyers, the agency said in a report.
The credit rating agency noted that within the housing segment, affordable housing continues to grow, primarily driven by loan volumes rather than value.
Moderating tailwinds
However, some tailwinds that had supported the sector earlier seem to be moderating and could slow down the pace of sector loan growth.
The agency opined that moderating tailwinds could slow down affordable housing finance companies’ growth.
Ind-Ra highlighted 1) rising interest rates, 2) reduced cash flow of borrowers on account of high inflation, 3) increasing cost of construction, leading to both rise in property costs and slowdown in new inventory launches, and 4) halting of the Credit-linked Subsidy Scheme as some of the challenges facing this segment.
As per Ind-Ra’s assessment, a 100 basis point (one percentage point) increase in the interest rates leads to borrower’s home loan Equated Monthly Installment (EMI) rising 6.1 per cent-6.4 per cent yoy in general, while for an affordable housing borrower, the loan EMI rises by about 5.3 per cent.
If the interest rate cycle continues to move up, a 200 bps increase could increase EMI in the range of 10.8 per cent - 13.0 per cent.