India’s real estate sector, especially the
residential property market has probably seen its worst phase in the
last three years.
India’s real estate sector, especially the
residential property market has probably seen its worst phase in the
last three years. Prices have also taken a beating and with slow sales,
inventory levels have increased to unprecedented levels. Consequently,
with diminished demand affecting the liquidity, the new launches have
been impacted as well.
The numbers game
According to statistics, new launches have
reduced by 6% in the first quarter of 2016 compared to the last quarter
of 2015. Overall in fiscal 2015-16, there has been a drop of 16% in new
launches (units) compared to fiscal 2014-15. A similar story unfolds in
sales figures too, where, as per recent data there has been a drop of
2.2% in total sold units in fiscal 2015-16 from fiscal 2014-15.
Analysing the percentages
In the wake of all these statistics, it would clearly
put a cloud of doubt over the average homebuyer’s decision of buying
into the current housing market. However, because of the modest price
appreciation in most cities in the past three years, homes have now
become more affordable today. A good explanation for this conclusion
would be the Affordability Ratio.
Strong demand drivers
There are strong demand drivers for the housing
segment, one of them being the urbanization rate in India. Out of
India’s population of 1.21 billion, 377 million people are urban
dwellers and more than 10 million people being added to urban areas
every year. The country’s urban population has grown at a compound
annual growth rate (CAGR) of 2.8% over 2001-11.
Just look ahead
Furthermore, over 2015-31, the pace of urbanization
is likely to increase at a CAGR of 2.1% - double than that of China. An
interesting thing to note here is that India’s households increased by
60 million between 2001 and 2011. But during this time, the number of
houses went up by almost 81 million. Despite this, according to the data
from March 2015, there is a shortfall of 18.3 million homes in India.
A huge gap
One of the reasons that can be attributed to this
shortfall can be the segment that the developers have got into – the
luxury and ultra-luxury premium properties which would essentially
target the middle income and affluent population in India. Since India
does not have too many millionaires and billionaires, there has been a
huge gap between demand and supply in this segment and home prices have
gone beyond the reach of many.
Most lucrative segment
The most lucrative segment currently would be the
affordable housing segment. According to RBI the cost of a house could
be Rs 6.5 million and Rs 5 million in the metros and non-metros,
respectively, to be qualified as affordable housing.
Though income levels have increased, but low sentiment on the housing market has prevented a faster flow of such income into housing. Since self-owned housing is still the number one priority for most Indian households, it is only a matter of time that this pent-up demand will eventually deploy into the market.
Though income levels have increased, but low sentiment on the housing market has prevented a faster flow of such income into housing. Since self-owned housing is still the number one priority for most Indian households, it is only a matter of time that this pent-up demand will eventually deploy into the market.
Several schemes launched
The government in its part has come out with many
schemes to give a boost to the affordable housing segment with
initiatives like ‘Housing for All by 2022’ and the ‘Smart Cities’
initiative. Besides this, another big reason for cheer would be the
passing of the Real Estate Regulatory Bill by the parliament. This Bill
would make the entire industry more transparent and would play a big
role in protecting the interests of the home-buyer.
Budget provides impetus
Also, the recent budget announcement has certain major reforms rolled out for ‘Affordable Housing’ like:
- Profits accruing from projects with flats up to 30 square metres in four metro cities and 60 square metres in other cities approved during June 2016 to March 2019 and completed in three years will now get 100% deduction.
- The deduction for additional interest of Rs 50,000 per year for loans up to Rs 35 lakh for first time home buyers, where house cost does not exceed Rs 50 lakh.
- Exemption from service tax on construction of affordable houses up to 60 square meters under any scheme of the central or state government.
Multiple market forces
There are various market forces that are playing a
hand in the current situation of the housing sector. With India poised
to grow at a healthy rate of 7.7-7.8% and industrial growth crawling
back to the positive zone in March, there is a lot of positivity in the
overall Indian economy.
Add to that the ability of the government to contain
the fiscal deficit to the targeted 3.9%, the lowering of crude oil
prices and the fact that 2016 being declared as a ‘La Nina’ year on the
back of expected favorable monsoons, everything seems to be going well
as far as the Indian economy is concerned.
The RBI has cut the Repo Rate by 1.5% since January
2015, which consequently would lead to lowering of home loan rates. This
has given an incentive to purchase for a buyer, hence boosting sales.
There has been a 9% increase in sales of units in first quarter this
year compared to the previous quarter.
To conclude, the housing market is the not out of
reach for many at the current moment. It’s the sentiment which has
turned negative and is preventing the buyers from buying houses. The
sales uptick seen in the first quarter could be a sign of things to come
and a probable revival in the housing market.
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