The Effect of Interest Rates on Nepal’s Real Estate Market: A Look at 2022 and Beyond

The Effect of Interest Rates on Nepal’s Real Estate Market:  A Look at 2022 and Beyond

Interest Rates play an important role in the real estate market. Interest rates determine the affordability, demand, and behaviors of investors. The cost of borrowing money impacts investors in real estate, developers, and home buyers. In this blog, we will examine how interest rates play a role in determining the nature of the real estate market in Nepal. Interest rates significantly affect real estate values, affecting both the supply and demand sides of the market. Let us know how the interest rates impact the property market of Nepal.

• Nepalese Real Estate Market

Before getting into the influence of interest rates in the real estate market of Nepal, understanding the environment of the Nepalese real estate market is crucial. Nepal has experienced a rapid urbanization boom in recent years, increasing demand for housing in both the residential and commercial sectors. Due to this, as well as rising disposable income, foreign investments, and improved infrastructure, Nepal has become a popular market for real estate developers and investors.

• Interest Rates in Nepal

The Central Bank of Nepal, Nepal Rastra Bank (NRB) sets the monetary policy and interest rates of Nepal. In the last few years, NRB has implemented policies to preserve financial stability, economic growth, and price stability. The effect of interest rates on the real estate market has significant importance in this context.

                        Interest rate effects on real estate values

• Affordability:

Real estate affordability is greatly influenced by interest rates. Low-interest rates result in lower borrowing costs, which makes it simpler for people to purchase homes. On the other hand, greater interest rates may discourage prospective purchasers resulting in greater monthly mortgage payments.

• Investor’s Sentiment

Real estate frequently becomes a desirable investment choice when rates are low since it is less expensive to finance the purchase of properties. On the other hand, investors may become less enthusiastic as interest rates rise.

• Supply and Demand Dynamics

Interest rates are a factor in the dynamics of supply and demand. Low borrowing rates can raise demand for houses, which might encourage builders to speed up their work. Higher rates, on the other hand, may cause a decline in demand and delay in the construction of new homes.

• Data Insights from 2022

            Nepal’s real estate market responded to changes in interest rates in 2022 in a variety of ways.

According to Monetary Policy 2022/2023, In mid-June 2021 the average base rate of commercial banks was 6.66 percent and   9.39 percent in mid-June 2022.

          In mid-June 2021, the average base rate for commercial banks was 6.66 percent; by mid-June 2022, it had increased to 9.39 percent. The weighted average interest rate on deposits was 4.72 percent in mid-June 2021 and increased to 7.34 percent in mid-June 2022. The weighted average loan rate was 8.46 percent in mid-June 2021 and increased to 11.54 percent in mid-June 2022.

         The Nepal Rastra Bank maintained a mostly constant policy rate during the first half of the year. This consistency helped investors and homebuyers maintain their interest. Property prices were stable, with minor price increases in some areas.

         To counteract inflationary pressures, the central bank raised interest rates in the latter half of 2022. This had a noticeable impact on the real estate market. Although there was no sudden drop in property prices, there was a minor decline in demand, especially in the residential market. Many prospective purchasers took a wait-and-see stance in the hopes that borrowing rates would stabilize.

• Estimates for 2023

         According to Monetary Policy 2023/2024, Short-term interest rates have decreased in recent months following the improvements in the external sector.  

            Long-term interest rates have also started to decline in line with short-term interest rates. The base rate of commercial banks which increased to 10.91 percent in mid-January 2023 has fallen to 10.18 percent in mid-June 2023.

           The weighted average deposit rate decreased from 8.51 percent in mid-January 2023 to 7.99 percent in mid-June 2023. The commercial banks’ weighted average loan rate, which peaked at 13.03 percent in mid-February 2023, progressively decreased to 12.53 percent by mid-June 2023.

         It is anticipated that the Nepalese real estate market will continue to react to fluctuations in interest rates in 2023. The following things might be influenced by how the market behaves:

Actions from Government: The government’s actions and policies to boost the real estate market and draw in foreign capital will be vital. These initiatives might be able to reduce the damaging effects of rising interest rates.

Inflationary Pressures: Interest rates will continue to be influenced by the central bank’s response to inflation. We could experience more rate increases if inflation remains an issue, which might reduce demand.

Market Resilience: In 2023, the strength of the Nepalese real estate market will be put to the test. Although increasing borrowing rates might be an obstacle, demand will still be driven by reasons including urbanization, infrastructure improvement, and population expansion.

Conclusion:

                     The impact of interest rates on the Nepalese real estate market is significant. As we can see from the statistics for 2022, changes in interest rates may have a big influence on supply and demand dynamics, investor mood, and affordability. As we move to 2023, the real estate market is expected to remain sensitive to fluctuations in interest rates but other elements, such as government efforts and market resiliency, will also be in action to influence. To make educated choices in the real estate market, investors, developers, and purchasers in Nepal have to use precautions and adapt to the changing economic environment.