Affordable vs Luxury: How RBI's Repo Rate Cut Will Impact Indian Housing Market

The Reserve Bank of India (RBI)'s decision to announce a significant 25 basis point reduction in the repo rate is expected to have far-reaching implications on the real estate sector, particularly the housing segment. Industry experts, including developers and investors, hailed the move which can enhance affordability for homebuyers with lower borrowing costs across various segments like luxury and affordable housing, commercial properties, and others.  

However, realtors’ apex body CREDAI holds a different opinion, hinting at the “limited direct impact” of the recent repo rate cut. It also sought further reduction in the next monetary policy meet for “stronger impetus” to housing demand.

The rate cut by RBI Governor Sanjay Malhotra will lead to reduced borrowing costs that would encourage credit flow, making home loans more affordable for homebuyers. This will, in turn, boost consumption and investment by incentivizing all real estate stakeholders.

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Housing Impact: Boost to Affordable or Luxury?

In 2024, India’s housing market was more inclined towards luxury segment and the affordable segment witnessed demand-supply mismatch. The luxury market saw a spectacular 37.8% leap over the previous year. Meanwhile, the mid-market plodded along at its stodgy post-Covid pace as prices spun out of the reach of most middle-income buyers amid unrelenting demand. Currently, over a million units in the so-called ‘affordable’ segment remain unsold across Indian cities.

But as the central bank has cut down rates, the question arises: Will it give a boost to affordable segment or luxury market? Realty developers have expressed mixed opinions, with some anticipating its impact on affordable housing segment while others are optimistic about its potential benefits to the properties that cost more than Rs 2 crore as well.

“The residential market will likely see stimulated demand, particularly in the affordable and mid-income segments. End-users as well as individual and institutional investors will increase their property purchases,” said Savills India CEO Anurag Mathur.

On the other hand, Conscient Business Head Mohit Agarwal said after holding 11 consecutive rate cuts, the recent announcement can lead to renewed momentum in the luxury housing sector, especially in metro cities, as lower EMIs and attractive financing options drive buyer confidence.

Buyers of affordable housing units are cost and rate-sensitive; today’s development will encourage fence sitters to make the move to purchase their dream house, said Nitin Bavisi, CFO, Ajmera Realty & Infra India, adding that the rate reduction will also help the developers of affordable housing projects.

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Cost Impact: Spur in New Housing Projects?

Besides benefits to end buyers, real estate developers also believed that the rate cut will also help them to accelerate the construction of new housing projects. Anarock Group chairman Anuj Puri also stated that the rate drop will make credit more affordable for working capital, land acquisition, and building.

“Its effect on building materials like cement and steel is limited, though, since these reply on worldwide supply chains and input prices. But when banks will pass on the rate drop, developers can get less expensive project finance, hence, lowering the overall expenses. The rising raw material costs and inflation, however, can temper down its advantages for developers in future,” he added.

Alphacorp CFO and executive director also said lower borrowing costs will not only enhance affordability for homebuyers but also improve liquidity, enabling developers to accelerate project completions and new launches.

Last year, the average housing prices increased by 13-30% in the top seven cities, with Delhi-NCR recording the highest 30% jump. The average prices in top 7 cities collectively stood at approximately Rs 7,080 per square feet in 2023-end, while in 2024-end it increased to around Rs 8,590 per square feet --- a collective increase of 21% annually.

Commercial real estate, especially office spaces, can also benefit from lower borrowing costs for businesses, and lower rates also make REITs more appealing since investors look for stable returns in a falling interest rate environment.

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Indirect Impact: More Rate Cut Required?

CREDAI National President Boman Irani, as quoted by PTI, said the supportive monetary policy was “imperative”, especially after the recent 50 basis points reduction in Cash Reserve Ratio (CRR), which has already injected liquidity into the banking system.

"While the current cut may have a limited direct impact, we anticipate that a further rate cut in the next MPC meeting will provide stronger impetus to overall demand, accelerating housing sales, particularly in the mid-income and affordable segments," he observed.

While the repo rate cut will undoubtedly benefit the real estate sector, its true impact on the housing market remains up for the debate. Developers either see it a catalyst for renewed demand or predict its muted effects than anticipated. Not only monetary policy, the future of the housing market also depends on banks, other government policies, and the cost of construction materials.