Is housing sensitive to the rate cycle?

Housing

Purchasing a house is more of a need-based purchase as compared to purchasing a car for personal use which is more of a lifestyle or a want-based purchase.

Another major differentiator is the fact that a home loan is a loan for acquiring an appreciating asset (under normal macroeconomic situations) whereas an auto loan is a loan for acquiring a depreciating asset.

Now, coming to the financial aspects of both these types of loans — let us compare an entry level vehicle purchase auto loan with an entry level house purchase loan in an average Indian city.

The EMI per Rs 1 lakh for an auto loan (for 5 years at 10 per cent) is Rs 2,125, while the same for a home loan (for 20 years at 10 per cent) is Rs 965, in a hypothetical scenario where both the interest rates are the same.

If we were to compare home loan and auto loans under a falling interest rate regime, for every 1 per cent drop in Interest rates, the EMI for a Rs 5 lakh loan decreases by Rs 260 whereas the EMI for a Rs 30 lakh home loan decreases by Rs 2,160. As it can be seen the impact of a similar drop in interest rates is much higher in the case of the home loan.

Also, since a home loan is a long term loan, this translates into a much higher credit eligibility for a home loan for an end user as compared to an auto loan. Hence, home loans are impacted to a greater extent with a small decrease in interest rates as compared to an auto loan.

With increasing loan eligibility amounts, the purchasing power gets a bigger spurt. The interest impact hence gets magnified for a home loan as compared to an auto loan.

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