The Reserve Bank of India (RBI) trimmed the repo rate by 25 basis points (bps) on Friday, taking the key lending rate to 5.25%. With this, the total repo rate reduction in 2025 is 125 bps. As banks begin to adjust lending rates, equated monthly instalments (EMIs) would tread lower and home loans could get cheaper. Typically, it should benefit the beleaguered affordable housing segment as it is more sensitive to interest rate movements.
“(Our) sensitivity analysis indicates that every 1% cut in the base lending rate results in a 0.24% increase in priority-sector home loans,” said Vivek Rathi, national director- research, Knight Frank India. Borrowers in the priority sector are typically from the economically weaker sections and lower income groups, also eligible for schemes like the Pradhan Mantri Awas Yojana (PMAY) subsidy.
However, while lower interest rates make housing finance more affordable, this itself has not been enough to substantially revive the subdued demand. The affordability of potential customers in the segment is generally weak, thus exposing them to various financial hurdles. While demand for affordable housing finance is robust, not every household qualifies as a creditworthy borrower, according to Elara Securities (India). This has weighed on the earnings growth of affordable housing finance companies (HFCs) lately. The September quarter (Q2FY26) saw companies grappling with slower disbursements, elevated early delinquencies and increased credit costs.
An analysis by Kotak Institutional Equities showed that disbursement growth of select affordable HFCs moderated to 10% in FY25 from 19-34% in the preceding two years. Aadhar Housing Finance Ltd, Aptus Value Housing Finance Ltd, Home First Finance Co. and India Shelter Finance Corp. are among the key companies in the sector. The management of Can Fin Homes Ltd told Kotak that since the credit-linked subsidy scheme has stopped, disbursements were weak for the entire industry. Since PMAY 2.0 was launched (in September 2024), the offtake has been muted, the payouts are deferred over a longer period, and new launches have not picked up, they added.
The ministry of housing and urban affairs recently sanctioned 141,000 additional houses under PMAY-Urban 2.0 scheme.
Expectations are that with more urbanization, the need for affordable housing projects would also rise. That brings us to the supply-side problem. For developers, rate cuts lower the cost of capital, which should help them accelerate execution of planned projects. But this may not change their current focus on premium and luxury residential segments, which tend to enjoy better margins and have more scope for price hikes. Anarock Property Consultants’ latest data showed that between 2022 and 2025 (year-to-date), affordable homes (units priced under ₹40 lakh) saw a far more modest average price appreciation of 26% versus 39% in mid-premium homes ( ₹40 lakh – ₹1.5 crore) and 40% in luxury (> ₹1.5 crore).
In this backdrop, elevated land acquisition and construction costs have made the affordable housing segment financially less enticing for many developers. Generating profit is challenging in these projects, and any delay in project delivery could translate into increased cost burden for the developer. Listed developers are betting on new projects in the fast-moving segments to achieve 18-20% year-on-year pre-sales growth in FY26. There are lingering concerns that a high base of the previous year and moderation in demand due to price hikes could slow the pace of pre-sales growth. But the tide is unlikely to turn in favour of affordable housing until fatigue sets in for the other two categories, leaving limited room for price hikes.
