Has the demand for home loans gone down after the rates have started rising in India?

In the last few quarters, India saw historically low home loan rates which did manage to give some sort of a boost to home loan demand. However, with home loan rates rising in tandem with the spike in bond yields, some kind of negative impact was always expected to happen. Now, actual data coming out from the industry is bearing out this trend. At the margins, people are getting a little wary of borrowing and committing to long term home loans in this market.

For the 10 months to May 2022, the loans outstanding for buying homes grew at their slowest sequential pace. The growth was a paltry 0.15% rising to Rs17.1 trillion. This was disclosed by the RBI data release. In fact, what is ironic is that this was the first time in the last six months that monthly growth rate in home loan stock had slowed to less than 1%. The home loan demand had picked to a peak of 6.7% in March 2022, just ahead of expectations of a rate hike. However, this growth had latter dropped to 1.3% in April.

RBI has already hiked the benchmark repo rate by 90 basis points in May and June and only after it hikes another 20 bps would we see a reversal of rates to the pre-COVID levels. RBI is expected to continue raising rates as real interest rate remains in negative territory. Mortgage loans are benchmarked to repo rate and so home loans have obviously become more expensive. This has led to a marginal fall in the share of home credit to total credit. The rise in yields has also impacted the demand for personal loans.

The slowdown in home loan demand is not just because of rates but also due to affordability. According to Knight Frank Research, all markets have seen a decline in affordability due to the recent rise in home loan rates. Home purchase affordability decreased by 2% on average across markets, and EMI load increased by 6.97% during the interim period.