Housing prices are alive and kicking
Can the selling price rise when a market is over-supplied and demand is dull? Economics tells us that it can’t, but the Indian housing market seems to be defying this rule.
Earlier this month, the Ministry of Housing flagged off a new index — the NHB Residex — designed to track housing price trends in 50 cities across India. Releasing the data, the Ministry claimed that the new index offered proof that demonetisation hadn’t dealt a big blow to the housing market.
Trends in the Residex certainly support this claim. According to lenders’ data compiled by the NHB Residex, as many as 32 of the 50 cities tracked registered rising housing prices and 13 recorded stable trends, in the twelve months to March 2017. Only 5 cities saw declines.
Large markets also exhibited very positive long-term trends. The Residex noted a 44% rise in home prices in Pune, 41% in Mumbai, 37% in Bengaluru and 33% in Chennai, from FY13 to the first quarter of FY17.
But this trend of resilient prices sits rather oddly with the tales of woe about the residential market doing the rounds in the last couple of years, which talk of slower sales and a stockpile of unsold homes.
A perfect storm
The year 2016-17 saw a perfect storm of events come together to dampen demand for housing in India. First came demonetisation and the resulting purge of the cash component in real estate transactions. Then the Budget delivered a rude shock by capping the tax break from ‘loss on house property’ at Rs. 2 lakh a year, for second and subsequent homes. This effectively put paid to the ‘investment’ buying of homes, a key source of housing demand in Tier 1 cities. Cloudy job prospects, stingy increments and layoffs for the IT sector dampened purchases by this crucial segment too.
The last nail in the coffin was the enactment of RERA (Real Estate Regulation Act) on May 1. The new law, which forces developers to segregate buyer advances and deploy it only in specific projects, was expected to result in a working capital crunch for developers. The industry was in go-slow mode in the run up to this event.
Reports show that these events did, in fact, shake up the housing market. Consulting firm Knight Frank India noted in a recent review that,the sales of residential homes in the top eight cities fell by a precipitous 48% in the second half of 2016, compared with the previous year. In January-June 2017, they climbed from that abyss, but home sales in these cities were still 11% below 2016 levels.
Slowing sales saddled developers with large unsold inventory.
Industry researcher Liases Foras estimated that, at an all-India level, builders sat on about 46 months of housing inventory in September 2016. In effect, even if they refrained from launches, it would take 4 years for them to liquidate their existing stock.
Why the price rise
Such excess inventory in any business would normally lead to sellers resorting to fire sales. But the Residex tells us that home prices didn’t fall in a majority of cities. What could explain this?
While one can only guess, there are three possibilities. One, given that home ownership is a big aspiration in India, new categories of buyers may have emerged to take up the slack.
For instance, while ‘investment’ buying was muted, it is likely that lower interest rates induced more first-time home buyers to take home loans to acquire residential property. The 12% growth in bank home loan disbursements in FY17, as per RBI data, indicates this.
Two, the lower demand for upmarket homes may have been made up by a surge in demand for affordable homes. In the last few years, much of the housing market activity in India was focussed on upmarket homes in the metros, costing upwards of Rs. 75 lakh. But there was a chronic shortage of affordable homes in the sub-Rs. 25 lakh segment. This past year, the Government launched a big stimulus package for affordable housing with an upfront subsidy, with the result that the supply of low-cost homes has jumped. The Knight Frank report notes that homes costing up to Rs. 25 lakh accounted for 36% of launches in H1 2017, compared with 17% a year earlier.
Three, it is also possible that, thanks to private equity or political funding, many sellers in the Indian real estate industry have staying power, allowing them to wait interminably for buyers to return.
Such explanations apart, the price trends captured in the Residex could also have a lot to do with the strange nature of the real estate beast.
Nature of the beast
One, unlike the market for shares, where all transactions take place on a national exchange and can be collated into a single ‘quote’, the housing market is fragmented into dozens of micro-markets.
Housing prices can vary widely between cities in the same State, localities within the same city and even neighbourhoods within a locality. Transactions are negotiated one-on-one between buyers and sellers and then reported; deal values depend mainly on the negotiating power of each buyer vis a vis the seller.
Two, for the prices in any market to realistically capture demand and supply, the number of reported transactions needs to be large. In the housing market, when prices are low, sellers are known to refrain from deals, leading to fewer transactions. Property deal-making was indeed at a low ebb across India this past year, with sellers unwilling to drop prices, buyers waiting for better bargains and new launches on hold. Therefore, it is quite plausible that the prices culled from the reported deals were not wholly representative of the market mood.
All these issues, however, don’t detract from the usefulness of the NHB Residex as an indicator. So far, home buyers had no publicly available benchmark to go by, when assessing list prices quoted by developers in their cities. Policy makers and lenders had no means to gauge long-term trends in housing across India, for decisions about monetary policy or interest rate-setting.
Investors weighing options had no means to compare real estate returns with those from asset classes such as shares or gold, to make sensible choices.