Inflation started raising its ugly head all over the world due to a variety of factors.
India also experienced somewhat elevated inflation but if you consider the economic environment, this is not really alarming. In fact, RBI has spoken about its discomfort as inflation is beyond its comfort level but refrained from taking very aggressive policies as such policies may hamper economic growth.
Nevertheless, RBI hiked interest rates and the days of very low home loan interest rates are probably over for now.
We were sure that the interest rate cycle would turn around and advised our readers accordingly.
But one big question every homebuyer should consider is this — should homebuyers postpone home purchase because of high interest rates?
Or should they go ahead and buy their chosen properties anyway?
When interest rates are too much?
How home prices are affected by inflation?
A well thought out response to these questions will help you determine what you should do — buy that property now or postpone.
Let us consider some of the factors you should consider before taking a decision.
Will Inflation Stay for Long?
Before we address that question, we must understand the root causes of inflation.
Currently, inflation is a global phenomenon and there are various reasons for it.
Let us see what they are.
- Loose monetary policy
Central banks worldwide had a loose monetary policy during the pandemic and this infused too much money into the system. As the world returned to normal, too much money started chasing too few goods and this raised inflation.
- Supply chain issues
One of the major causes of the elevated levels of inflation is the various disruptions of the global supply chain. As demand for goods suddenly went up as the world economy reopened after Covid, there was massive stress on the supply chain because it was not built for such a sudden hike in capacity.
There are an inadequate number of ships and containers, and even factories in countries like China did not start full production.
- War in Europe
The Russia-Ukraine war and resulting sanctions on Russian oil and gas meant higher energy prices. As energy cost is a key component of the cost of all goods, this also stoked inflation.
The situation was aggravated by higher energy requirements in Europe and North America because it kept the energy costs higher.
- Return of Covid in China
China is a powerhouse that produces raw materials for almost all goods and the return of Covid there and the zero-Covid policy ensured that the factories failed to buzz at full capacity.
This factor raised the prices of almost all intermediate goods and finished products and was also responsible for higher inflation.
- Seasonal factors
There is also a seasonal factor of inflation in India. Seasonally, the per-winter period sees high inflation, especially food inflation, which reduces with the advent of winter.
Food inflation is already on a declining trajectory as fresh winter produce comes to the markets.
Interestingly, inflation is already losing steam in India and although RBI will probably decide to continue with the current interest rates and even hike somewhat but the days of aggressive rate hikes are over. Galloping home loan rates are hardly expected now.
Will High-Interest Regime Persist for Years?
The real estate sector is one of the brightest spots in the Indian economy right now. 2022 was one of the best years for this sector in a long time.
The property sector is a significant part of the GDP and is a key catalyst for job growth. It also supports various other industries related to real estate.
Indian economy is optimistic about high growth right now and any policy which will hurt an important sector such as the real estate sector is the least expected.
In addition, let us understand that inflation is cyclical and high inflation will give away to low inflation.
Some major factors affecting inflation are already receding.
As a matter of fact, a lot of loose money is taken out of the monetary system by interest rate hikes and bond purchases by central banks. Supply chain issues are largely sorted out. Prices of oil and gas are also stabilising. China is reopening with determined vigour. And food prices came down substantially in India.
Similarly, interest rate regimes are also cyclical.
The high-interest environment will go away after some time and the low-interest regime will kick in.
If you take a home loan, the tenure is generally more than 15-20 years.
Usually, during this long period, multiple high and low-interest regimes will come and they will kind of average out each other.
Today’s high-interest regime will soon turn into a low-interest environment.
Are Home Prices Going Up Because of Inflation?
While you focus on interest saving, the price of your dream home is going up because of prevalent inflation.
As we have seen, prices of raw materials and intermediate goods are rising because of the inflationary impact.
Property prices are also going up. In fact, it is going up more than the interest rate.
There is also another factor to consider.
Most of the gated communities which are accepting booking now are slowly getting sold out.
That means the apartments homebuyers prefer are going to be booked.
Delaying your home purchase may mean the most preferred apartments are not available for you.
What are the Benefits of Buying a Property Now?
Let us consider the financial impact of postponing your homebuying.
Even if you book your property at a period of benign interest rate, it does not mean that the low-interest rate regime will continue till the end of your home loan tenure.
Interest rates are cyclical and over the tenure of your loan, there will not be any considerable savings, considering that home loans are predominantly based on floating interest rates.
Conversely, if you buy a property now, you can avoid most of the price rise and also buy the preferred flat in a residential complex.
How You Can Take an Easy Decision — Our Advice
In an inflationary environment, the price of hard assets such as real estate and gold goes up.
As expected, the prices of real estate and gold have soared in the recent period.
Inflation may remain somewhat elevated before the cycle turns and it recedes.
But before that happens, the prices of apartments will go up considerably.
Your financial outgo is likely to be much more than the savings of interest amount if you wait and buy your home in a low-interest situation at a future date.
Moreover, there is considerable property demand right now for a variety of factors. In fact, 2022 saw the highest property demand and the momentum is continuing.
However, new property launches take time. Supply of new properties catches up with demand with a lag, and meanwhile, there is a demand-supply mismatch.
Property prices go up during this period.
This phenomenon is currently playing out in Kolkata and this is the strong reason why you should not wait to buy your flat now.
Buy your home today. Contact us now.