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The Impact of Interest Rate Fluctuations on the Real Estate Market

Author
Blox Social
Posted on
Apr 12, 2023
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There are a bunch of factors that impact the real estate market, with interest rates and inflation being two of the most critical factors. An investor needs to understand the relationship between such economic factors and their influence over the market to make a prudent decision while picking their next property investment option. 

Many lending institutions recently increased their lending rates post an increase in the off-cycle rate by the Reserve Bank of India (RBI) in May 2022. The bank increased the repo rate (at which it lends short-term money to banks) by 40 basis points to 4.40%. This increase in rates has had a profound impact on the real estate market and homebuyers’ sentiments as well. So, how are these two related to each other? 

Let us get some basic information about interest rate fluctuations before diving into their impact on the real estate market

How Are Interest Rates Determined?

Interest rate refers to the amount of money charged on the principal by a bank or a financial institution to use assets. The rate is determined based on a number of factors, including the state of the economy. And the interest rate is set by the country’s central bank, which is then used by all the other banks to determine the range of annual percentage rates (APRs) they would offer. 

Although real estate has proven to be one of the safest and most lucrative investment options time and again, it is subject to market fluctuations and prevailing economic conditions. So, to make an informed decision, investors, as well as homebuyers, must know the effect of interest rates and inflation on real estate investment. And in this blog, we are going to talk precisely about that: 

Understanding The Relationship Between Interest Rates and Real Estate

Before making a real estate investment decision, one must take a closer look at the interest rate, as it can significantly impact the overall cost of borrowing. And this can, in turn, even impact the supply and demand for real estate.

So, when interest rates are lower, borrowing costs are reduced, which makes more and more people willing to invest in real estate. This increase in demand can further lead to higher property prices and even increase competition in the market. 

On the contrary, when interest rates increase, borrowing costs increase, making people less willing to invest in property. 

Thus, in case of inflation, central banks tend to raise the interest rates as higher interest rates would also increase the cost of debt, in turn discouraging borrowing and slowing consumer demand.

Impact on Inventory and New Construction

Two critical factors that influence the price range of each and every commodity are supply and demand. And this is how the real estate market also functions. New construction is the main way to bring in more supply to the current housing market and, thus, meet the increasing demand of investors and homebuyers. 

However, there are a few factors, such as rising interest rates, and labour and materials costs, that can slow down the new construction of houses. This can eventually limit the supply of new houses in the market. This can cause supply-chain issues, which were witnessed largely during the pandemic.

What Does the Future Hold?

As mentioned earlier, the Reserve Bank of India (RBI) has recently increased the interest rates in May 2022. There is expected to be a significant impact of interest rates on buyers in the coming years. And to be prepared for the fluctuations in the market, it is important to know what the future hold. 

There have been some polls that can help us get an idea as to how the real estate landscape can change in the coming time. 

According to a Reuters poll held by 13 expert property analysts, it is expected that property prices in India will increase by 7.5 per cent on a pan-India basis this year. In another poll, the analysts expected an increase of 5.0 per cent in properties for this year.

Another region-specific Reuters poll stated that there could be a rise between 4 per cent and 5 per cent this year and in the coming year. This poll was specifically done for two of the most important cities in the nation - Mumbai and Delhi, including its surrounding National Capital Region. However, the prices in Bengaluru and Chennai are expected to rise 5.5 per cent and 6.5 per cent, respectively, in the coming two years. 

Conclusion

Understanding how economic factors, such as interest rates and inflation, affect real estate investments is crucial in making informed decisions. Real estate investments can be a valuable source of income. And we hope that the information we provided has equipped you with the necessary knowledge to effectively navigate economic changes and make profitable real estate investments. 

Finance & Legal