What if I were to say that the home prices in the United States impact the value of your investments in India. You will probably turn around and ask me to go take a walk.
But the fact of the matter is that there is actually a link between the two and we have reached a stage where the link perhaps matters more than it ever did. Nonetheless, before we get into understanding this, it’s important to know how we got here in the first place.
In late 2019 and early 2020, rich world central banks led by the Federal Reserve of the United States, the American central bank, started to print a lot of money, first to take care of the economic slowdown and then the economic contraction because of the spread of the covid pandemic.
The idea was to drive down interest rates. At lower interest rates people were expected to borrow and spend money. Interest rates on thirty year home loans in the United States fell to as low as 2.65% in early January 2021, the lowest they had been since 1971, the year from which this data is available.
Naturally, with interest rates at such low levels, more people started borrowing and buying homes than was the case in the past. While the demand for homes went up quickly, their supply couldn’t go up as quickly to meet this extra demand. Hence, home prices went up, at a very past pace.
In April 2022, home prices in the US, as per the S&P Case-Shiller 20-City Composite Home Price Index, went up by 21.2% in comparison to April 2021. Home prices have been rising at more than 17% year on year from May 2021 onwards. This kind of price rise wasn’t even seen during the real estate bubble of the 2000s.
One straight impact of this has been rising home rents. As per Realtor.com, the median rent in the United States in May 2022 was 23.2% higher than in May 2020 and 15.5% higher than in May 2021. This rise in home rents feeds into retail inflation. As The Economistputs it, in May 2022, the “rising housing costs already accounted for 40% of the monthly increase in the consumer-price index [which measures retail inflation].”
In May 2022, the retail inflation in the United States stood at 8.6%, the highest since December 1981, when it was at 8.9%. People are now building in this high inflation into their monetary calculations; in the home-rents they demand and in the salaries and wages they ask for.
In May 2022, the median one-year ahead expected inflation rate in the United States was 6.6%, the highest that it has been in a while. As any economist would put it, once inflation expectations set in the minds of people it becomes very difficult for central banks to control inflation.
So, in this scenario, it has become very important for the Federal Reserve to control the fast pace at which housing prices have been going up, given that it can’t do much about the high energy prices, due to the war in Ukraine.
The Federal Reserve has decided to gradually withdraw some of the money that it had printed and pumped into the financial system. Between June 2021 and May 2022, it expects to suck out close to a trillion dollars, bringing an era of easy money to an end.
This is already pushing up home loan and other long-term interest rates in the United States. As of June 30, the median interest rate on a 30-year fixed interest rate home loan had risen to 5.7%, from a low of 2.65% in early January 2021.
As the Fed keeps sucking out money, the interest rate on home loans will keep going up and this will hopefully drive down the demand for fresh homes and the rate of price rise of homes. As home price inflation cools down, rental inflation will also cool down and in turn bring down retail inflation. That’s the theory.
Other than taking out the money it had printed, the Federal Reserve also plans to raise its key short interest rate, the federal funds rate. This is expected to drive up short term interest rates in the United States.
The end of the era of easy money and rising interest rates in the United States will have an impact on investments in India. In fact, this is already happening. The foreign institutional investors (FIIs) have already sold Indian stocks worth Rs 2.56 trillion between October 2021 and July 1, 2022. This has led to the value of investments in stocks, equity mutual funds and unit linked insurance plans, falling.
Further, as FIIs sell out of India, they convert their rupees into dollars, leading to a surge in the demand for the dollar and drop in the value of the rupee. One dollar is currently worth around Rs 79. It was worth around Rs 74.5 at the beginning of 2022. This makes life expensive for those looking to study abroad or to go for a foreign holiday.
As the Federal Reserve raises interest rates, the Reserve Bank of India will have to do the same. This will push up interest rates on loans as well as deposits in India. Hence, people with loans are likely to end up paying higher EMIs, whereas people with deposits are likely to earn a higher interest than was the case in the past. Again, this is already happening.
Of course, a big impact of the rise in interest rates in the United States has been on crypto prices, which have crashed by close to 80% from their all-time high-levels, leaving many zoomers poorer.
All in all, as the old cliché goes, when America sneezes, the whole world catches cold.
This piece originally appeared in the Deccan Herald on July 3, 2022, with a different headline.
This piece emerged out of a couple of WhatsApp conversations I had over this weekend, along with a few emails that I have received over the last few months.
From these conversations and in trying to answer the emails, I have tried to develop a sort of checklist of things to keep in mind, while buying a home. Of course, as I have said in the past, when it comes to personal finance, each person’s situation is unique, and which is why it’s called personal finance.
Nevertheless, there are a few general principles that can be kept in mind. Also, this list like all checklists, is complete to the extent of things I can think of.
So, let this not limit your thinking and the points that you need to keep in mind.
Here we go.
1)If you are buying the house as an investment (not in my scheme of things, but nonetheless), please learn how to calculate the internal rate of return on an investment. Believe me, you will thank me for the rest of your life.
Also, keep track of the cost of maintaining a house and other costs that come with it. Only then will you be able to know the real rate of return from investing in a house.
Otherwise, you will talk like others do, I bought it at x and I sold it at 2x, and get lost in the big numbers, thinking you have made huge returns. While this sort of conversation sounds impressive, it doesn’t mean anything.
2) Don’t buy a house to generate a regular income. The home rentals in the bigger cities have come down post covid. Even if they haven’t, the rental yields (rent divided by market price) continue to be lower than what you would earn if you had that money invested in a fixed deposit (despite such low interest rates).
Of course, the corollary here is that as a landlord you choose to declare your rental income and pay an income tax on it. Many landlords prefer to be totally or partially paid in cash and choose not to pay any income tax.
3) From what I have been able to gather from my conversations, people in a few cities are still flipping houses. In fact, the trick is to invest before a project gets a RERA approval and then sell out as soon as the approval comes through. This reminds me of the old days when the builder never really knew the people who ended up living in the homes that had been built.
Anyway, if you are flipping homes, do remember that many people caught in the real estate shenanigans of 2009 to 2011, are still waiting for their homes. Many of them are investors. So, if you are flipping homes, do take some basic precautions like not betting your life on any one deal. As the old cliche goes, don’t put all your eggs in one basket.
4) Also, do remember that you are an individual and the builder is a builder. While many stories of David beating the Goliath have come out in the media, many more stories of Goliaths having crushed Davids, never made it to the media.
It was, is and will remain, an unequal fight. Do remember that. For a builder this is the life that he leads, you, dear reader, on the other hand, have many other things to do. And you are looking for a home to live in, not a builder to take on. So, be careful.
5) One question that I often get is, which bank/housing finance company should I take a loan from. I don’t think this should matter much. Most big banks and housing finance companies charge similar interest rates. As we say in Hindi, bus unees bees ka farak hai.
So, go to the financial institution which seems to be the most convenient to you.
6)One story being pushed in the media is that you should buy a home now because interest rates are low. Among many dumb reasons for buying a home, this is by far the dumbest. Interest rates on home loans are not fixed but floating interest rate loans. If the cost of borrowing for banks and housing finance companies goes up, so will the interest rate on floating rate home loans.
No one can predict which way interest rates will go in the medium to long-term (That doesn’t stop people from trying. Many economists build careers around this). So, currently, the interest rate on a home loan is around 7% per year or thereabouts. If you are buying a home, make sure that you have the capacity to keep repaying the EMI even at an interest rate of 10% per year. This is very important.
7) How do you structure the amount you pay for the home? What portion of the home price should be a downpayment? What portion of the home price should be your home loan? These are very important questions. The answer varies from person to person. Nevertheless, the one general principle I would like to state here is that don’t dip into your retirement savings as far as possible to pay for the downpayment.
It might seem like a good idea with retirement far away and your parents encouraging you to do so because they did the same and it worked out fine for them. Nevertheless, do remember that on an average the current generation will live longer than its parents, and the family support that your parents had or will have in their old age, you may never have.
8) Also, from the point of diversification, it makes sense not to bet all your savings on making the downpayment for a home. Do remember, no job or source of income is safe these days. Further, do ensure that at any point of time you have the ability to pay six to 12 EMIs, without having a regular source of income.
Other than being able to continue repaying your EMI, it will also help you have some time to look for a job or another source of income, if the current one goes kaput. Money in the bank, buys you time, which helps you make better decisions in life.
And most importantly, if your EMI is more than a third of your take home salary or monthly income, rest assured you are in for trouble on the financial front.
9)If you want to buy a home to live in, go for a ready to move in home. I have seen completion dates for RERA approved projects going beyond 2025 in Mumbai.
The other advantage with a ready to move in home is that some people are already living there and if there is some problem with the building (not a huge deal in India) then there are many more people who have a stake in solving the problem (as convoluted as this might sound). As always there is strength in numbers.
10)Finally, be sure why you are buying a home. You want to live close to your place of work. You want your child to have some stability in life. You don’t like the idea of moving homes, every couple of years. And so on.
But please don’t buy a home because your parents, in-laws, extended family or relatives, expect you to do so and it gives them something to chat up on or some meaning to their lives. These are financially difficult times and making the biggest financial decision of your life to impress others, isn’t the smartest thing to do possibly.
To conclude, as I said in the beginning this isn’t a complete list by any stretch of imagination. Each person’s situation is unique. Also, you may not end up with a tick mark on all these points mentioned above and you may still end up buying a home. But the advantage will be that you will know clearly where you are placed in the financial scheme of things.
The points essentially help you think in a structured way to arrive at a decision. They do not make the decision for you. That you will have to do.
PS: Don’t know if you noticed that the terms house and home, have been used at different places. Hope you appreciate the difference between the two.
Yesterday evening I had gone to meet a cousin who lives in the Western suburbs of Mumbai. All along the way, there were billboards of Kotak Mahindra Bank advertising its home loans, which are available at an interest rate of 6.65%.
A few things have happened because of these low rates. There have been scores of stories in the media citing surveys where everyone from women to HNIs to NRIs to millennials seem to want to buy a house and they want to do it right here and right now.
Of course, these surveys have been carried out by real estate consultants, whose very survival depends on the real estate sector doing well. Incentives as they say.
Low interest rates on home loans also have led to stories in the media suggesting that this is best time to buy a house. The other thing that has happened is that analysts have been recommending stocks of home finance companies (HFCs).
The logic being that at lower interest rates people will take on more home loans. This will help the loan book of HFCs grow, making them good investment bets. How easy all this sounds? But is it?
All this stems from the flawed assumption that people borrow more at lower interest rates and live happily ever after. Let’s see if that is true or not.
Take a look at the following graph. It plots the increase in home loans outstanding during the period April to January, over the years.
Source: Author calculations on data from Centre for Monitoring Indian Economy.
What does the above graph tell us? It tells us that despite very low home loan interest rates, the increase in home loans given by banks between April 2020 to January 2021, stood at Rs 78,577 crore. This was around half of the increase of Rs 1,56,362 crore between April 2019 to January 2020.
Even between April 2018 and January 2019, the increase stood at Rs 1,46,227 crore. Clearly, people borrowed much more when interest rates were higher. Hence, the logic that people borrow more when interest rates are lower, basically goes for a toss.
In fact, the increase between April 2020 to January 2021, was the second lowest in six years in absolute terms. The lowest increase of Rs 74,837 crore was between April 2016 to January 2017. This period included demonetisation when banks had more or less stopped doing everything else and concentrated on taking back the demonetised notes from the public.
If we look at the period between April 2016 to October 2016, before demonetisation happened, the increase in home loans had stood at Rs 64,501 crore. Clearly the disbursal of home loans slowed down in the post demonetisation months.
There is another point that needs to be made here. Other than banks, HFCs or home finance companies, also give out home loans. Typically, banks give out two-thirds of the home loans and HFCs, the remaining third. Nevertheless, the last couple of years haven’t been good for a few HFCs. This has meant that some of the business of home loans has moved from HFCs to banks.
Once we take these factors into account then we can conclude that the increase in home loans during this financial year, has been the worst in six years. And this despite the extremely low interest rates. In percentage terms, the increase in outstanding home loans during this financial year has stood at 5.97%, the lowest in six years, and the only time the increase has been less than 10%.
Why is that the case? For economists and analysts, the interest rate is the most important parameter that people look at while taking a home loan, nevertheless, a little bit of common sense tells us that this isn’t the case.
Let’s try and understand this through an example. As per HDFC, India’s largest HFC, their average home loan size is Rs 28.5 lakh. Their average loan to value ratio at the time of giving the loan is 70%. This basically means that HDFC on an average gives up to 70% of the price of the home as a home loan.
This basically means that the average price of a home in the books of HDFC against which they give a home loan, stands at Rs 40.7 lakh (Rs 28.5 lakh divided by 70%). Let’s round this to Rs 41 lakh, for the sake of convenience.
What does this mean? It means that in order to buy a home, other than taking on a loan of the buyer first needs to make sure that he has savings of around Rs 12.5 lakh (Rs 41 lakh minus Rs 28.5 lakh) to make the downpayment on the home loan. Even if the money is available, he or she needs to make sure that they are in a position to spend that money.
This is not where it ends. In many parts of the country a portion of the real estate transaction is still carried out in black. Money needs to be available for that. Further, a stamp duty needs to be paid to the state government. Then there is the cost of moving into a new house (everything from transport to perhaps new furniture).
Once we factor these things into account, we can conclude that the home loan forms around 50-60% of the overall cost of buying a house. Further, in a time like present, any individual thinking of buying a house will have to weigh the decision against the possibility of losing their job or facing a drop in income in their line of work.
Now let’s consider the average home loan of Rs 28.5 lakh. At 7% interest and a tenure of 20 years, the EMI on this amounts to Rs 22,096. At 9%, the EMI would have worked out to Rs 25,642. Hence, the EMI is Rs 3,546 lower.
So, yes, the EMI is lower. But what will the buyer first look at? The lower EMI or the ability to be able to pay the lower EMI and be able to continue paying it in the days to come. Of course, the buyer will look at his ability to pay the EMI and be able to continue paying it. Also, it needs to be remembered that the interest rate on the home loan is a floating one, and can rise in the years to come.
Hence, this decision will be based on the confidence that the buyer has in his or her own economic future. This is not something that can be measured at an aggregate system level and varies from buyer to buyer. The point being that everything that is important cannot necessarily be measured in numerical terms.
Having said that, the confidence in the economic future will be currently low, with many individuals losing their jobs or seeing their friends, relatives and acquaintances lose jobs. Hence, other than losing a job, there is also the fear of losing the job. There has also been a drop in their income or in some cases small businesses have been shutdown.
Also, whether it is the best time to buy a house or not, like most things in personal finance, it depends on your finances and more importantly your mental makeup of what you want from life. If you want to settle in life and make your parents and relatives happy, and have the money to do so, then now is as good a time as any to buy a home.
Please keep this in mind at every point of time in life when some expert tells you that this is the best time to do this or the best time to do that.
So, right now if you think you have enough money and enough confidence to keep paying the EMI, and want a home to live in, then please go ahead and buy one. Also, make sure that you have enough savings to pay the EMI for at least six months to a year, even without your main source of income.
To conclude, buying a home is not just about low interest rates. There are several other factors, which people who are in the business of selling real estate, seem to conveniently forget about.
Then there are surveys in which a high proportion of people end up saying they want to buy a home to live in. Of course, they do. But just wanting to do something doesn’t add to demand. I mean, I want to buy a house in central Mumbai, but I also know that ain’t going to happen. My finances don’t allow it.
The real estate rating and research firm Liases Foras recently put out some interesting data in a report titled, Residential Real Estate Market Report. Let’s look at this pointwise.
1)The home sales in the top 60 cities in India in 2020 stood at 2.62 lakh units. This was down 31% from 2019, when it had stood at 3.77 lakh units.
2) The sales in tier I cities (Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai Metropolitan Area, National Capital Region, Pune) stood at 1.85 lakh units in 2020, down 32% from sales in 2019 when 2.75 lakh units had been sold.
3) The sales in tier II cities in 2020 stood at 76,603 units down 25% from 2019 when 1.03 lakh units had been sold.
4)The overall unsold housing inventory was down 6% to 12.52 lakh units in 2020, against 13.32 lakh units in 2019. The value of homes sold in 2020 stood at Rs 1.73 lakh crore, whereas the value of the inventory outstanding is at around Rs 8.65 lakh crore. At this rate, it will take five years to sell the current inventory (Rs 8.65 lakh crore divided by Rs 1.73 lakh crore).
Of course, this does assume that no new construction will happen over the next five years, which is a wrong assumption to begin with. Hence, the current inventory will take longer than five years to sell, unless sales pick up at a dramatic rate, which as far as I see it is unlikely to happen, given the state of the economy and the general purchasing power of Indians, which the real estate industry never seems to take into account.
Let’s use this data and make some assumptions to explain all over again why the Indian real estate industry is in a mess and what can be possibly done to revive it.
1)In 2020, a total of 2,62,055 homes were sold across the top 60 cities in India with the total value of these sales being Rs 1,72,770 crore. This means that the average price of a home sold stood at Rs 65.92 lakh (Rs 1,72,770 crore of sales divided by 2,62,055 homes sold). In comparison to 2019, the average home price has barely fallen. In 2019, the average home price was Rs 65.96 lakh (Rs 2,48,861 crore of sales divided by 3,77,295 homes sold).
Let me not analyze this number further and make a few adjustments first.
2)Let’s consider the tier I and tier II cities separately. The average home price in tier I cities in 2020 was at Rs 74.37 lakh (Rs 1,37,921 crore of sales divided by 1,85,452 homes sold). The average home price in tier I cities in 2019 was Rs 73.57 lakh (Rs 2,02,089 crore of sales divided by 2,74,680 homes sold). In tier I cities, despite home sales crashing by 32% in terms of number of units sold, the average home price has gone up marginally. There can be various local reasons for it which the overall average won’t reveal, but on the whole it is safe to say that real estate sales don’t seem to follow the basic law of demand in India. They never have and which is why the sector has been in a mess for more than half a decade now.
3)Within tier I cities, let’s make one more adjustment by first checking what was the average home price in Mumbai Metropolitan Region (MMR), which tends to be higher than other parts of the country, simply because prices in Mumbai city tend to be very high. The average home price in MMR in 2020 was Rs 94.98 lakh (Rs 46,043 crore of sales divided by 48,479 homes sold). The average home price in 2019 had stood at Rs 99.11 lakh (Rs 67,938 crore of sales divided by 68,543 homes sold). Hence, the price in MMR has come down by 4.2% on an average between 2019 and 2020.
4) Now let’s calculate the average price of a home in non MMR tier I cities. The average home price in a non MMR tier I city in 2020 stood at Rs 67.07 lakh (Rs 91,878 crore of sales divided by 1,36,973 homes sold). The average home price in a non MMR tier I city in 2019 had stood at Rs 65.08 lakh (Rs 1,34,151 crore of sales divided by 2,06,137 homes sold). Hence, the average home price in non MMR tier I city in 2020 has gone up by a little over 3%.
5)Now finally let’s look at the average home price in a tier II city. The average home price in a tier II city in 2020 stood at Rs 45.49 lakh (Rs 34,849 crore of sales divided by 76,603 homes sold). The average price in 2019 had stood at Rs 45.58 lakh (Rs 46,772 crore of sales divided by 1,02,615 homes sold). Given this, the average home price in tier II cities has barely moved between 2019 and 2020.
What does all this data tell us?
1)At the risk of sounding as cliched as I can sound and have been sounding for years, the price of real estate in India is too high. Of course, we are looking at average prices here, but do take into account the fact that even in tier II cities the average home price is close to Rs 50 lakh.
In a tier I city without Mumbai, the average home price is close to Rs 67 lakh. Of course, there are tier I cities, like Pune and Ahmedabad, where the average price is closer to Rs 50 lakh. But even that is very high when one takes into account the fact that the per capita gross national disposable income in 2020-21 is expected to be around Rs 1.46 lakh.
Thus, the per capita household disposable income amounts to Rs 7.3 lakh (given that there are five people in an average Indian household). What needs to be kept in mind here is that this is the mean income of a household or the average income of an Indian household and not the median income or the income of an average Indian household. Hence, the income of the an average Indian household must be much lower than Rs 7.3 lakh per year.
2)Clearly, the real estate builders are building homes only for a certain section of the population, the very rich. And that has limited their market. In 2001, the number of urban households had stood at 5.58 crore. In 2011, this had jumped by 41.3% to 7.89 crore. Looking at this data, it is safe to say that by 2021, the number of urban households would have crossed 10 crore. Let’s assume it is at 10 crore households, which I think is a reasonable assumption to make, given that the number of actual households should be much greater looking at the past trend and increasing urbanisation.
3)A bulk of these 10 crore households would be living in the top 60 cities of urban India. In these cities, in 2020, a total of 2.62 lakh new homes were sold by builders. In 2019, the number was at 3.77 lakh homes. Let’s further assume that Liases Foras probably does not capture all the new homes being sold by builders across these 60 cities. Even if the homes sold were double of this number, they are barely a very small fraction of less than 1% of the total number of households in urban India. And this is true not just about 2020, it is equally valid for 2019, a non-covid year.
Of course, not all homes sold are new homes. People who have bought homes as an investment in the past and are now selling them, also need to be considered. There is no data available for this, but even if there was, the prices at which these homes were sold couldn’t have been significantly different from the new homes being sold by builders, hence, limiting their affordability.
4)As I had said in my Mint piece earlier this week, India needs real affordable housing, homes which can be built and sold profitably in the range of Rs 5-20 lakh in Indian cities. Of course, these homes will be smaller in size, but they will be definitely much better and more humane than living in slums. And imagine if something like this takes off, what it could do to economic activity in a post covid world. Building of real estate leads to a lot of economic activity. Every apartment requires, cement, bricks, sand, steel, pipes etc. It also requires people to take on home loans.
The real estate sector has forward and backward linkages with 250 ancillary industries. This basically means that when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well. The multiplier effect is huge.
Also, real estate is one sector which can create a lot of semi-skilled and unskilled jobs, very quickly, thus help people move away from agriculture, which tends to employ more people than is economically feasible.
5)Of course, this is easier said than done. First, it needs the real estate industry to consider the idea of doing business profitably at a much lower price, which it currently doesn’t seem to have got its head around to. Over the past few years, the real estate industry has maintained that it is difficult to cut prices given that input costs have gone up over the years.
It recently blamed the steel and the cement sector for driving up real estate prices. The cement industry has responded by saying: “only Rs 150/sq. ft of built up area constitutes cement costs. The amount being so low … is this not hoodwinking gullible consumers?”
I am no civil engineer and have absolutely no idea about what it costs to build a building, an apartment and so on. But what I do understand is that if real affordable housing has to become the order of the day, home prices need to come down and come down dramatically.
6)One thing holding back affordable housing is the cost of land in and around big cities. At the heart of this is the issue of Change in Land Usage (CLU). Agricultural land beyond a certain size cannot be owned, as per the land ceiling regulations. This limit varies from state to state. What this does is that it limits the amount of land available in cities unless the state government intervenes. And the moment that happens, the cost of the land starts to go up.
7)The central government and the state governments own a massive amount of land in Indian cities, which is lying unused. Over the years, some of it can be made available for real affordable housing. Of course, wherever there is land and there are politicians, there is scope for corruption (I really have no answer for this, honestly).
8) In a recent research report, IIFL securities looked at the cost of redevelopment projects in Mumbai. The figure that caught my eye is that the construction cost is 30.8% of the total cost. So, whatever the real estate industry might say, the construction costs forming less than a third of the overall cost, are really not the problem. I guess in non-redevelopment projects the construction cost as a proportion might be more, but even with that the problem is somewhere else.
It is the remaining charges that need to be brought down. Interestingly, charges related to the government in different ways (everything from floor space index charges to staircase premium to taxes to liaison cost) made up for around 40% of the overall cost. Clearly, the government is the problem here. The dependence on revenue from real estate for state governments needs to come down.
9) I am not an expert on this, but I do feel that this is an idea that needs to be made to work and there are experts out there who can look at it in a more detailed and feasible way.
To conclude, the problems holding back Indian real estate are huge and it will be very tough to sort them out. But as the corporates like to say in adversity there is opportunity. And real affordable housing is a huge opportunity, only if someone can figure out how to run a profitable business at lower costs. As the late Professor CK Prahalad would have said there is a fortune to be made at the bottom of the pyramid.
If you are the kind who follows the business media closely, you would probably be thinking that for the last few months all people have done across India is buy homes to live in. But is that really true? The short answer is no, though sales did pick up during October to December 2020, in comparison to the three month period before that. But whether that was pent up demand or genuine demand coming back, only time will tell.
A thriving real estate sector really helps the overall economy grow at a fast pace. But given the mess that the Indian real estate sector has been in for many years, and the fact that the deep state of Indian real estate won’t allow market forces to work to help clean it up, that isn’t really going to happen.
Let’s look at the issue in more detail.
1)As per the annual roundup of residential real estate published by PropTiger Research, sales in 2020 contracted by 47% to 1.83 lakhs across eight large cities (Delhi NCR, Mumbai, Pune, Ahmedabad, Chennai, Bengaluru, Hyderabad, Kolkata).
In short, 2020 was a bad year for real estate. Having said that, sales during October to December 2020 picked up and 58,914 units were sold, which was 68% more in comparison to the number of units sold during July to September 2020. In comparison to October to December 2019, sales were down 27%, during the period.
Of course, the real estate sector wants us to believe that demand is back and all is well with the sector. Nevertheless, this jump in sales can be because of pent up demand. Whether it sustains in the months to come remains to be seen. This is an important caveat to keep in mind.
2)More than half of these sales have happened in Mumbai and Pune. The reason offered for this is the cut in stamp duty carried out by the state government. The Maharashtra government cut the stamp duty applicable on real estate transactions from 5% to 2%. This was applicable until December 31, 2020.
The stamp duty cut driving up builder sales, is true to some extent. Given that the price of an apartment in a city like Mumbai runs into crores, even a 3% saving on the price runs into a decent amount of money. But more than the stamp duty cut, a substantial drop in prices, especially for homes priced at more than Rs 2 crore, is the main reason for the sales in the city picking up.
Of course, you haven’t read about this in the mainstream media simply because the mainstream media depends on advertisements from real estate companies and needs to keep driving the notion that real estate prices don’t fall, over and over again. (Another reason you need to support my work).
One reason for a fall in prices is the fact that businessmen who run small and medium enterprises have been facing a tough time since covid broke out. And they are looking at alternate avenues to raise money to keep their businesses going. This includes selling the real estate assets they have accumulated in the past. There is some distress sale as well.
Also, other than Mumbai and Pune, the other six cities account for less than half the sales. This tells us clearly that real estate sales in these cities are at best sluggish.
3) The clearest trend in the PropTiger data is that 48% of the sales have been for apartments selling at a price of less than Rs 45 lakh. What this tells us is that high prices remain the biggest challenge of owning a home in India. It also tells us that while home prices haven’t really fallen, on the whole across India, despite the lower demand, the demand that remains is primarily at the lower end of the price spectrum. Hence, the market has corrected itself in its own way, despite home prices not coming down in absolute terms. This is an important lesson that the real estate industry needs to learn.
Also, 74% of the sales have happened for home prices of less than Rs 75 lakh.
4)As far as prices are concerned, the PropTiger report points out: “Weighted average prices for new launched projects across the top-eight cities remained stagnant in the past few quarters, with prices moving in close ranges.”
This is something that is also reflected in Reserve Bank of India’s 10 city house index, though the cities tracked by this index are not the same as the cities tracked by PropTiger.
Source: Centre for Monitoring Indian Economy.
The cities tracked by the RBI’s 10-city house index are Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Ahmedabad, Lucknow, Kanpur, Jaipur and Kochi. The index tells us that the average one-year return of owning real estate in India during the period July to September 2020, stood at 1.13%. This is the lowest since the index came into existence. The index also tells us that the return on real estate during 2020 has been marginally negative.
What this means is, and as I have often said in the past, Indian real estate is going through a time correction and not a price correction. The inflation seen over the last two years has been around 6% per year on an average. This means in real terms, the prices have already corrected by more than 12%, over a two year period.
5)This trend is likely to continue given the huge amount of inventory that remains piled up with builders. The overall inventory stock is at 7.18 lakh units across eight cities as per PropTiger. It has come down from 7.91 lakh units in 2019, simply because builders aren’t launching as many new projects as they used to.
Having said that, with the sales slowing down, at the current sales pace it will take around 47 months to clear the remaining inventory. Even though all this inventory is not ready to move in, a significant portion is. Also, it is worth remembering that the prospective buyers have a choice when it comes to buying a home. Over the years, investors across the country have ended up buying a huge number of homes in the hope of a price appreciation. Many of these homes have remained locked and are available for sale.
As Bhargava wrote in a recent column: “Resale transactions are traditionally 2/3rd of the market.” Even if this proportion were to come down, resale transactions of locked homes will continue to form a significant chunk of the market, making it difficult for builders to cut down their inventory quickly. Also, even if builders don’t offer ready to move in homes, there is a significant supply that will keep coming in from individuals who have bought real estate as an investment over the years.
6)Homes priced below Rs 45 lakh form 48% of the inventory. What does this tell us? It tells us that the real demand for homes is at a price even below Rs 45 lakh, probably below Rs 25 lakh. This is something that the builders need to keep in mind. It may not work in a city like Mumbai, where land available is limited and expensive, but it will definitely work for the other seven cities that PropTiger tracks and other parts of India, where cities can expand in all directions and land is really not an issue.
7)It is worth remembering here that builders have benefitted because of the Reserve Bank of India allowing banks and non-banking finance companies, to restructure commercial real estate loans.
“In February 2020, ‘living dead’ borrowers in the commercial real-estate sector – under a familiar guise (‘a ghost from the past’, if you will) viz., ad hoc ‘restructuring’ – have been given a lifeline. It is estimated that over one-third of loans to builders are under moratorium.”
Patel does know a thing or two about banks and lending and hence, needs to be taken seriously. It remains to be seen for how long will the RBI continue supporting the builders. The longer, the RBI supports the builders, the longer they can hold on to a significant price cut. This also means that inventory will take longer to clear and home prices will continue to stagnate. It is all linked.
8)At a macro level this means that the ability of real estate to create jobs for the unskilled and the semi-skilled, will continue to remain limited. It is also worth remembering that real estate as a sector can have a huge multiplier effect on the overall economy.
The real estate sector has forward and backward linkages with 250 ancillary industries. This basically means that when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well.
If this were to happen, the Indian economy would really benefit in the post-covid times. But sadly it won’t, given that the deep state of Indian real estate which includes, builders, banks and politicians, will make sure that the sector is continued to be treated with kids gloves and any problems which could lead to a price cut, are kicked down the road. Trying to maintain the status quo in the sector is not helping the Indian economy.
9)Dear reader, some of you by now must be like all this gyan is fine, but tell me one simple thing, should I buy home or should I hold on to my money. The answer as always is, it depends. It is worth remembering here, that what we can possibly do with our money is a very individual thing.
If you are looking to buy a home to live in and have the capacity to pay an EMI and arrange for a down-payment, then this is a good time as any to buy a home. Owning a house has its own set of advantages. Parents and in-laws feel you have settled in life. There is no danger of the landlord acting cranky. And once you have children it gives them some kind of stability with friends, activities as well as the school they go to. Of course, address proofs don’t need to change, every time you move house.
Having said that do keep in mind that we live in tough times and the negative economic impact of covid is yet to go away. Also, there can be further cycles of the spread of the virus. Before taking on a home loan, ensure that you have some money in the bank to be able to continue paying the EMI in case you lose your source of income.
When it comes to investing in a house, it continues to remain a bad idea on the whole. Of course, there will always be some good opportunities and some distress sales happening.
10) Finally, everyone who makes a living out of selling real estate will spend 2021 trying to tell us that demand is coming back, people are buying homes, new trends are springing up and all is well.
As PropTiger points out:
“By making bare the limitations involved in other investment assets, the pandemic has forced people to rethink their investment strategies, tilting it in favour of home ownership.”
This is basically rubbish which has been written well. Why would anyone in their right mind during tough economic times, invest a large part of their savings and/or take on a large loan to buy an illiquid asset?
Some people who can afford it, may have definitely bought new homes in order to adjust to the new reality of work from home, but beyond that the proposition that PropTiger is making, remains a difficult one to buy.
If it were true, some of the massive amount of easy money that is currently floating around in the financial system, would have gone into real estate as well. But given that sales have crashed 47% during 2020 tells us that it clearly hasn’t.
In fact, the outstanding home loans of banks between March 2020 and November 2020 have gone up by just Rs 44,463 crore. This is around two-fifths of the increase (38.7% to be precise) in outstanding home loans of Rs 1,14,636 crore seen between March 2019 and November 2019. This is despite the fact that home loan interest rates have come down to as low as 7%.
So, people are generally being careful when it comes to buying a home by taking on a loan and that is the right strategy to follow at this point of time.