How long will this go on? A day after the Reserve Bank of India (RBI) raised key rates to tighten money supply, the top two financial institutions controlling 60 per cent of home loans signalled further increases in interest rates on Saturday.
Market leader ICICI Bank raised the effective interest rate by as much as one percentage point to 12 per cent, while number two HDFC is all set to increase its lending rate by 0.75 percentage points to a range of 11.25 to 11.5 per cent by Monday. Other banks are expected to follow suit.
Sanjay Chandra, managing director of realty firm Unitech, said builders will offer smaller houses to make purchases affordable, arresting the trend for premium homes.
"As affordability has become an issue, the ticket size will come down," he said.
The silver lining in the cloud is that higher rates will stop a speculative frenzy in the property market, and this could cool prices.
At the back of it all lies the fact that agricultural prices have been up, pushing costs, while foreign exchange inflows have fuelled demand. Both factors have stoked inflation, which has forced a rise in lending rates.
While consumers are worried about the prospect of a further rise, experts say swapping floating rates for fixed rates may not help as switching costs are high.
Floating rate borrowers are bound to feel the pinch as equated monthly instalments (EMIs) are set to rise. For a 20-year-loan the EMI will increase by around Rs 68 per lakh. Since June 2004, the effective rate has gone up by nearly 5 per cent, while the EMI per lakh has zoomed Rs 326 (42 per cent) to about Rs 1,101 per lakh.
A senior HDFC official said those earning less than Rs 6 lakh a year will be pressured because banks lend for an EMI equal to about 35 per cent of a month's salary.
"They have to defer their buying plans," the banker said.