Residential real estate sector in India: Coming to terms with the new realities

Summary

Ever since the tide turned, because of the pandemic, the realty sector was already grappling with piled up unsold inventories. The growth in bank lending to housing sector had been plummeting since October 2019. Things have further got aggravated by shrinking income levels due to the on-going crisis and the fall in housing loans becoming steeper. The demand slowdown had been keeping price growth in real estate sector in check. In terms of data for tracking the housing market by RBI Indian house prices have been moderating since the beginning of 2017. With the underlying crisis a recent poll by Reuters estimates that Indian house prices will slump 5% in 2020 for the first time in at least a decade. The COVID-19 crisis has also served as an eye opener for many on the importance of owning a home, hence, presenting an opportunity for builders to consider launching and delivering budget friendly homes with shorter timelines.

Emerging trend in residential real estate sector during Covid-19

As the Covid-19 pandemic continues to play havoc, piled up unsold inventory, aggravated by sluggish demand and shrinking income levels have caused the real estate sector to take a beating. There is a change in perception towards home ownership becoming a new priority with onset of Covid-19 crisis. With volatility in investment options in financial market, physical assets render more sense of security during a crisis such as Covid-19 presenting a new opportunity for the builders.

Time to hit the reset button

Experts believe that a sudden drastic recovery in the demand for premium priced properties would be unlikely. The crisis has also resulted in a gradual consensus that there is a need for price correction in real estate. Moderation in prices would act as booster for buyers as well as developers carrying huge bank loans and inventory burdens.

There was a general perceived opinion that the realty market had become a kind of asset bubble, especially in metros, with pricing not being entirely reflective of the intrinsic value.  As is evident from the moderation in Indian house prices since the beginning of 2017 which reached a low of 3% YoY in Oct-Dec 2019. It then increased to 3.9% in Jan-March 2020. However, the receent Reuters poll estimates that Indian house prices will slump 5% in 2020 for the first time in atleast a decade.

Growth in all India housing price index has been moderating since 2017

The essential link in the realty chain: bank credit

With relatively steep property prices and tax benefits on home loans, many avail a home loan to fund property purchase. The growth in bank lending to housing sector has been plummeting much before Covid-19 struck the economy. It got accentuated further due to the adverse impact of COVID-19 outbreak. In the last four consecutive months, credit disbursal to housing sector fell sharply to 12.9% YoY in May from 17.1% February 2020. The reduced credit allocation hints at low project launches due to sluggish demand. It is learnt that in the Apr-June 2020, housing sales dipped by a severe 81% with a drop of 98% in new project launches.  

For a faster transmission of changes in the policy rates, RBI has linked the home loan interest rates to repo rate. Since the COVID-19 pandemic has begun the RBI has reduced the repo rate to an all-time low of 4%, making the home loans cheaper for buyers. However, it is noteworthy that during this uncertain time cheap home loans alone would not revive the housing market. It will also be contingent upon the price correction in the housing market that can in turn lead to buying of more properties.

Key factors that would shape the future of housing

Along with factors such as location, amenities and ready to move in status it has become apparent that the lower interest rate regime and more importantly moderation in housing prices will help the realty sector. Nudging banks to lend more to the housing sector and more initiatives by the government for an overall economic recovery will also decide the future course of the housing market.

Written by:

Guest Columnist

Sandhya Krishnan

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