Affordability has improved
Affordability depends on three factors: the house price, income levels and home loan rates. “House prices have remained almost flat for the past five years, which helped improve housing affordability,” says Siva Krishnan, MD Residential Services, JLL India. “Affordability to buy a house has never been as good as it is now. By and large, the property prices were stable during the past five years. Considering an annualised increment of 7-8%, affordability has gone up by that much,” says Keki Mistry, Vice Chairman & CEO, HDFC. Improving job prospects after the pandemic scare have also boosted affordability. Job creation is on the rise and some sectors like IT are on a hiring spree. Most people, who faced pay cuts during the pandemic, have now seen restoration of their salaries. As a result, the ratio between house price and annual income has hit a multi-year low of 3.2 times.
Real estate prices have remained almost flat in past five years
During the same period, the average annual consumer inflation was 4.9%.
Affordability has steadily risen in past 10 years
Stable house prices, rising incomes and low-interest rates have combined to boost affordability.
Aiding this trend further is the fall in interest rates. “More than 90% of home buyers use housing loans. The decline in interest rates helps them take bigger loans, which increases the affordability,” says Krishnan. For the first time in decades, the Mumbai market has become affordable.
Home affordability has risen across the country
Houses are most affordable in Kolkata, but even in Mumbai houses became affordable in 2021 after being out of reach for years.
Action already started
The improvement in affordability and buyer sentiment is already reflecting in sales numbers. Total sales of residential units in July-September 2021 in eight major cities went up by 17% in the past three months and by 57% in the past one year. All cities except Kolkata reported significant growth in sales.
Recovery gathered pace in the second quarter
With stable prices and low interest rates, demand is expected to increase further in the third quarter.
Registration of home sale documents, which includes the resale properties, also signals about this revival. “Improvement is visible everywhere and Mumbai recorded highest ever October registrations. This is higher than October 2020 and is achieved without the stamp duty sops available in last year,” says Gulam Zia, Executive Director, Knight Frank India. The sale documents registered in Mumbai in October 2021 hit 8,576, up by 8% compared to October 2020. The number of sale registrations in Mumbai had spiked in October 2020 due to the stamp duty incentives offered by the Maharashtra government last year. It was the highest number of registrations in October in the past eight years. So, the 8% growth this year is on a higher base. Homebuyers have not been deterred by the withdrawal of stamp duty benefits.
Mumbai home buyers not deterred by withdrawal of stamp duty benefits
Mumbai residential market has started standing on its own feet.
Rise in number of launches
With demand on the upswing, builders have started launching new projects, though the 238% year-on-year increase in new launches is because of the low base effect. There were very few launches during the second quarter of 2020 due to Covid. However, there is a healthy 33% quarteron-quarter increase as well. “The number of new launches increased in the July-September quarter and more are expected in the October-December quarter,” says Pankaj Kapoor, MD, Liases Foras. Though new launches have increased, they are yet to reach the pre-covid levels. “They are still 50% less than the precovid level,” says Subhankar Mitra, MD, Advisory Services, Colliers India.
With sales recovery, builders are launching new projects
With expected increase in demand, launches may also go up in third quarter.
Decline in unsold units
Despite the rise in new launches, the number of unsold homes fell marginally during the July-September period (see graphic). In absolute terms, the inventory fall was only by 1% q-o-q and 4% y-o-y. But it was significant because there is an increase in the sales velocity. Also, the developers who were earlier launching luxury apartments have realised their mistake and focusing more on the mid and affordable housing segments. Since more buyers are interested in ready-to-move-in properties, the inventory reduction there is the highest. “Inventory of ready to move-in apartment has come down from 24 months to 17 months,” says Kapoor of Liases Foras.
Unsold inventory fell marginally during Jul-Sep period
Additional supply is getting absorbed due to increasing demand.
Prices at an inflection point
Despite the surge in demand, housing prices remained relatively stable during July-September period. With the unsold inventory still high, builders may keep rates stable for some more time. However, experts say that this good period may not last long. Several hints to that effect are already visible. First, the offers (see box) and freebies from builders are not as generous as in previous years. This is largely due to the change in the financial situation of builders. “Last year, the situation was really desperate for builders. With many builders repaying their loans, they have become confident now,” says Mitra of Colliers India.
Despite surge in demand, prices remained stable during the Jul-Sep period
With the unsold inventory still high, builders may keep rates stable for some more time.
There are other reasons as well. GST, demonetisation and the pandemic have made strong players stronger in every sector, including real estate. “Around 30-40% of the active developers are out of the business now,” says Krishnan of JLL India. While small-time builders are struggling for funding, continued inflow from private equity funds to organised builders is helping them to improve their financials. According to a recent Anarock study, the PE funds inflow to Indian real estate has gone up by 27% in the first half of 2021-22, compared to the first half of 2020-21.
Improvements in sentiments
The improvement in market sentiment is another reason why there aren’t too many attractive discounts this year. “The builders have realised that transactions are happening even without big offers,” says Gulam Zia of Knight Frank India. The present offers are broader and done with the intention of getting visibility to the project. “While other sops are reducing, buyers must understand that the builders maintaining price itself is a sop,” says Krishnan of JLL India.
Jump in construction costs
While it may be possible for builders to offer freebies in existing projects, it will be difficult for them to do so for new projects due to jump in construction costs. Prices of key commodities used in construction, such as cement and steel have seen a marked increase in the past 1-2 years. “Developers have their backs pushed to the wall by high spikes in input costs which show no signs of abating and are unlikely to relent unless the government intervenes,” says Anuj Puri, Chairman, Anarock Group. “With the increase in commodity prices and jump in labour costs due to Covid disturbances, the room for developers to cut the price is almost zero,” says Krishnan of JLL India.
Prices up in some pockets
In addition to reduction in offers, some builders have started raising prices of some projects. However, this trend is yet become widespread. “As of now, the price increases are restricted to high-demand and low-supply projects by leading developers,” says Puri of Anarock Group. Does that mean that the prices will firm up further in 2022? While everyone agrees about the imminent price rise, experts are divided about that happening in 2022.
“Some builders are increasing prices in pockets which signals that the prices have bottomed out. However, most builders may wait for a year before they raise prices because real estate market is just turning around and developers will try to maintain demand with stable pricing,” says Gulam Zia of Knight Frank India. Others agree with this view.
“As on date, real estate is a buyers’ market and it will remain like that for one more year because builders have to keep the prices stable to make it affordable for end users,” says Kapoor of Liases Foras. However, Puri of Anarock Group thinks that there will be some price rise in 2022. “A 2-3% price increase is certainly a strong possibility in most markets during the course of 2022 and perhaps even higher, depending on developers, in specific projects and locations,” he says.
Don’t wait for rates to fall
Not just house prices, it seems even the home loan rates have bottomed out. “Home loan rates have already been low and are unlikely to go down any further,” says Manish Shah, MD & CEO, Godrej Housing Finance. There are several reasons behind this. First, global central bankers, including RBI, have started taking cognisance of rising inflation and therefore, don’t expect further rate cuts from them. Also, there is now swift transmission in rate changes. “Earlier, transmission of rates cut by RBI used to take time. But the same is happening smoothly now,” says Nandan of Savills India. In other words, there is no cushion left with banks to cut home loan rates any further.
Home loan rates have started stabilising
With RBI thinking of reducing liquidity, rates may not go down further.
India’s mortgage penetration is still very low
With large portion of population below 35, penetration is expected to improve in the coming years
In fact, HDFC’s home loan rates for borrowers above Rs 75 lakh has inched up by a bit during the past one year. This rate increase is only for people with less than 800 credit score because HDFC is offering special rate of 6.7% for people with credit score above that during this festival season. Will an increased competition bring down the margins of housing finance companies and bring the rates lower? This also may not happen; because the mortgage penetration is still very low in India. “The housing loan penetration in India is very low compared to other countries and India’s demographic dividend is also favouring housing finance players. So, opportunity is big for all players and I don’t think any player needs to hit their own margin for growth,” Mistry of HDFC. Demographic dividend refers to the existence of large number of youngsters in our population, who are more comfortable to take loans.