How Will Interest Rate Rise Affect Property in India?

The Reserve Bank of India increased interest rates last week and surprised the property market in so doing - because while an increase was expected it was not expected so soon.  Looking forward, the majority of economists polled by Reuters in a recent survey relating to interest rates in India fear that further increases are imminent and that sharp reactions from the Reserve Bank could undermine the Indian economy. 

The rises come as India attempts to rein in its economic advancement to remain within sustainable levels.  So how will the interest rate rise affect property in India?  Well, the answer seems to depend on who’s buying what and why…let’s take a closer look at the situation.

The good news for those with investment property assets in India already is that the majority of economists that Reuters surveyed about their opinions relating to the economy and interest rates in India are currently of the opinion that there will be no crash or even hard landing in terms of the Indian property market - unless the Reserve Bank again applies sharp breaks in the form of unexpected rate rises. 

The general consensus of opinion is that in the main metros demand is still sufficiently intense to keep property prices high - although a higher cost of borrowing may reduce the number of new developments coming to the market in the medium term.  In two tier locations where demand may rescind, prices will have to readjust downwards but not in a dramatic fashion. 

Looking beyond this opinion and conjecture, what does seem certain is that there will be a significant slow down in speculative purchasing activity by investors for at least the short term.

This is in part because interest rate increases means borrowing has become more expensive - this makes it more expensive for investors to fund their purchases and it makes it more expensive for new homeowners to enter the market.  This has the double effect of making it less attractive for an investor to buy in and harder for those who do buy in to resell their Indian property stock.  Another reason for a reduction in speculative property purchasing activity is because the unexpectedness of the rate rise unsettled the industry.

For non-residents Indians waiting to buy property in their homeland it’s a time to wait and watch…chances are, over the short term property prices will begin to come down, rebalance and become more affordable in real terms - so naturally those who can wait may very well be rewarded with more affordable property prices.

For institutional investors who are determined to enter the Indian marketplace because it is one with incredible long term potential it’s possibly a time to look overseas for financing.  Whilst they are doing so they can also watch for a correction in property prices before buying in with cheaper financing – in this way they can reap immediate rewards from the solid and in demand Indian property market as a result.

And finally, for those who are not in a position to wait…e.g.., those workers who are finding employment in the main metros such as Delhi, Mumbai, Chennai, Kolkata and Bangalore where property prices are already very high, there is little option but to take on the more expensive financing now available - possibly for an even longer term - and find housing because it is in relatively short supply in many of these areas already, and further interest rate increases could put that required home even further away in terms of its affordability.

In conclusion, last week’s rate rise will not dramatically impact on market activity or prices although it’s likely activity will be more cautious and some prices will readjust.  The actions taken by the Reserve Bank of India were taken for the right reasons and the market can absorb them…but the bank and the Indian government need to be very careful of all future actions taken to balance economic activity as one false move could spell a sudden reversal of business and investor sentiment and result in a hard landing for the economy and the property market in particular.

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