The Reserve Bank of India’s recent move to reduce the CRR from 4.5% to 4% is set to boost liquidity in the banking system , in turn facilitating banks to  lend more  to home loan seekers at rationalised rates. This has also set the stage for a much awaited interest rate cut by the RBI in the next couple of months amidst expected easing of headline inflation,  thereby pushing up housing credit offtake and boosting home ownership.

Vinod Behl

This development should be seen in the backdrop of RBI pressing a pause button on high interest rates for 11 consecutive credit policy pronouncements. This pause on high interest rates maintained  by the Reserve Bank   since 2022 , along with surge in home prices  had somewhat slowed down home sales especially in  affordable housing  as well as in the price-sensitive segment of INR 50 lakh -1.5 crore. This is clearly evident from the fall in housing sales during the third quarter (July-September 2024).It is another matter that keeping  in mind the bullish trend during the first half of 2024 and anticipated spike in festive December quarter, residential developers are hopeful of a resurgent year.

The global property consultancy, JLL in its report has said that the residential prices had shot up at a faster pace than annual household income increase over the past 2-3 years, impacting affordability levels ,with interest rates remaining high.  While 2021 saw peak affordability across all markets, rising prices and sticky interest rates caused affordability levels to dip through 2022 , 2023  and well into 2024.This adverse impact on affordability has a direct bearing on housing sales and home ownership.

In this backdrop, the recent statement by the Union Commerce & Industry Minister, Piyush Goel advocating rate cut, also assumes significance. He made a case for RBI to ignore food inflation while deciding for interest rate cut. Even the Economic Survey of 2023-24 had said that the monetary policy framework should consider targeting inflation that excludes food which is influenced more by supply chain than demand. This inflation versus growth debate has come to the fore with FY 25 Q2 growth slumping to 5.4%, necessitating the need for an early rate cut. The State Bank of India Chairman, C S Setty has hinted about the first rate cut by the RBI happening in February 2024.

Meanwhile, according to JLL , India’s residential real estate market is poised for an affordability shift in 2025 with a projected interest rate cut on the horizon. Despite Year-on-Year (YoY) decline in affordability since 2022 due to price hikes and stagnant interest rates, most markets are anticipated to see improved affordability levels by 2025, except for Delhi-  NCR and Bengaluru. This improvement is currently anticipated with predictions of a cumulative 50 basis point cut over the next few months.  According to JLL’s Home Purchase Affordability Index (HPAI). Mumbai and Pune are expected to approach optimal affordability levels by 2025, while Kolkata is set to maintain its status as the most affordable market, potentially hitting new peaks.

A key factor in this positive outlook is the anticipated shift in monetary policy. The Reserve Bank of India (RBI) recently changed its stance from withdrawal of accommodation to neutral followed by a cut in CRR , setting the stage for a potential rate cut cycle. A total of 50 bps repo rate reduction and a complementary interest rate decline cycling through the economy over the next 12 months is expected to function as a catalyst improving affordability levels and supporting the continued momentum in the residential market.

Looking ahead in 2025, experts like Siva Krishnan, Head, Residential Services, India, JLL believe that the combination of healthy income growth, potential interest rate reductions, and moderating price growth is expected to improve affordability levels over the next year, paving the way for sustained market activity and continued strong performance in India’s residential real estate sector in the medium term.