Is housing sensitive to the rate cycle?


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.

... contd.

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