How Repo Rate Affects the Real Estate Industry?

Real estate sector does not function in isolation within our country. Performance of the industry is dependent on a host of factors like the state of economy, government policies, real estate laws and regulation etc. Any significant changes on the economic and political front have a ripple effect on the real estate industry too. 

The Goods and Services Tax (GST) and the Real Estate (Regulation and Development) Act, among others, had a tremendous influence on the real estate industry, and changed how it operates to a large extent.

The recent development is an announcement of the Reserve Bank of India to keep the repo rate unchanged. The current repo rate stands at 4.00%. An idea about this rate would impart an understanding as to how it affects the real estate industry.

What is repo rate?

The Reserve Bank of India extends a loan to commercial banks if the latter has a shortage of funds. The rate of interest against which this fund is provided is termed as the repo rate.

Increasing repo rate restricts borrowing and lending to a large extent. It means there will be less liquidity. In such a situation, even though inflation can be contained, economic growth gets negatively affected. On the other hand, lowering economic growth would allow banks to borrow more from the central bank, which would infuse more money supply within the market.

All these aspects have a strong influence on the real estate industry in our country.

Impact on the real estate industry

The impact of repo rate can be understood based on the following parameters –

  1. Loan

Most of the commercial banks have adopted the repo rate as an external benchmark. So any changes on the same would also have to be passed on to the customers. When the rate is reduced, it also influences the rate of interest charged by banks. Such benefit impacts both property developers as well as home loan borrowers.

As the cost of availing funds reduces, the developers are in a better position to not only complete projects faster but also launch more and more projects. Moreover, lower home loan interest rates encourage buyers to invest. Many financial institutions also extend pre-approved offers to facilitate the application process. These are usually provided on secured and unsecured credit, including home loan, loan against property, etc. You can check your pre-approved offer by submitting a name and contact number.

  1. Equated Monthly Instalment (EMI)

Detailed information on EMI is one of the key aspects you must know before taking a home loan. If the Reserve Bank of India reduces repo rate, EMI for home loan borrowers would also be lowered by banks. Such development ensures improvement in market sentiments, leading to more sales.  Investors and borrowers revive confidence in property investments.

  1. Buyer sentiment

As mentioned before, GST and RERA brought in a significant change in how the real estate industry operates.

  • Under the Goods and Services Tax regime, input credit benefits are passed on to developers for purchase of construction materials. Buyers, in turn, are also benefited in the form of lowered prices and discounts.
  • The implementation of RERA imposes higher accountability from property developers concerning deadlines for project completion, terms of sale, etc. All these have the impact of leading towards greater transparency in the process of a sale. It is one of the major benefits that first time home buyers can experience with RERA in action.
  • ●       Financial transactions require greater transparency. In this backdrop, property developers also have to adhere to monetary transactions above the board. It also acts as an encouragement for home buyers, which also positively impacts the real estate industry.

Overall, it is usually beneficial for buyers and developers of real estate if there is a repo rate drop.