HT Estates

Whatails the housing market?

DECLINE A slew of factors combined with the general economic slowdown have led to a dampened market for sellers

- Anuj Puri letters@hindustant­

The ‘golden years’ of Indian residentia­l real estate are well and truly over, at least in the short to mid-term. The sentiment of endusers as well as investors who previously banked heavily on residentia­l real estate for maximum returns is seriously curtailed.

Housing sales soared to 3.5 lakh units in 2014 ( the best between 2013 to 2019) but fell to a mere 2.1 lakh units in 2017, immediatel­y post demonetiza­tion. Homebuyers perched themselves on the fence, awaiting more favourable market trends, and investors backed out completely.

There is no questionin­g the fact that the various reformator­y changes that havecontri­buted to the slowdown were necessary to radically transform a sector historical­ly marred with unscrupulo­us activities. While the insurance sector and stock markets are heavily regulated, real estate remained a ‘wild west’ marketplac­e held to ransom by developers and brokers who did whatever they wanted to turn a quick buck.

However, while radical reformator­y change was indeed required, these unaccustom­ed reforms caused an upheaval from which the Indian housing market has yet to recover. Home sales are seriously low and have not rebounded to their earlier peak levels. Though we saw some green shoots of revival in 2018, current housing sales trends indicate that they are unlikely to come rally back to their peak levels anytime soon.

Here’s why housing, Indians’ most-favoured investment route of yesteryear­s, has fallen from grace today: The returns on investment­s in residentia­l real estate have dropped from two or even threedigit values to low single-digit or, in many locations, even negative returns over the last few years. This naturally keeps investors at bay - and investors need to be in the driver’s seat for the market to revive. The ROI from housing currently clocks in at a meagre 2-3% even in the most favourable markets across Indian cities.

Cash- conservati­on is the order of the day in a country where citizens are unsure of getting jobs, or job continuity. Torpor in the economy and ensuing job insecurity is a sure-fire consumptio­n killer

The massive burden of heavily delayed and terminally stuck housing projects on the market is both a cause and effect when it comes to low homebuyer sentiment. Under- constructi­on homes were previously Indian homebuyers’ default choice due to the more competitiv­e prices. Neither end-users and certainly not investors are interested in putting money into a depreciati­ng asset. They would rather wait for prices to sink to their ‘lowest best’. The fact that housing prices have already bottomed out does not register since the sector is widely perceived to be in such turmoil that further price correction­s seem inevitable. The sales currently being registered are largely to end-users who got good deals and were tired of waiting. However, the bulk of buyers who could tip the scales in favour of a convincing housing revival prefer to wait and watch in a market where renting homes is cheap. Moving cautiously, RBI has laid down stricter norms and guidelines for banks dispensing housing loans. In recent times, the loan-to-value (LTV) ratio - the amount of loan that can be given for aproperty of acertain market value – is now restricted to 70%, whereas it previously ranged between 80% and even 90% of the property value.

In short, buyers availing home loans now have to pay 30% of the property cost upfront. When too many aspiring buyers either don’t have that kind of money on hand or prefer to hoard it because of uncertain economic headwinds, sales will fall. Both the real estate and automobile industries fall prey to the same dynamic of cash-conservati­veness. To add to this, NBFCs/HFCs have also slowed down their lending to individual homebuyers. GST has replaced the multiple levels of taxation previously applicable on a home purchase, but the increased simplicity has not resulted in better cost-efficiency.

Under-constructi­on homes attract 5% GST for premium (mid-range) properties and 1% for affordable homes. However, this does not include ITC benefits, which would have reduced the overall purchase cost. Over and above, 5-7% stamp duty and registrati­on charges apply to both under-constructi­on and ready-to-move homes but the cumulative extra cost on underconst­ruction homes effectivel­y negates most of the price advantage they used to offer.

Not surprising­ly, most housing purchases today are in ready-to-move properties which do not attract any GST. However, developers need working capital to complete their ongoing projects. The lack of buyer interest for under- constructi­on homes deprives developers of one of the previously ‘ traditiona­l’ funding routes - interestfr­ee capital raised directly from the market.

This dynamic perpetuate­s the vicious cycle of the overall slowdown in the sector - buyers are averse to investing in under-constructi­on homes, projects get delayed because of lack of funding, and slow or no constructi­on progress further dampens buyer sentiment.

The problem of low job creation looms large in India, even though the economic growth rate is predicted to be the highest. The Periodic Labour Force Survey (PLFS) by the National Sample Survey Office (NSSO) maintained that the unemployme­nt rate in both urban and rural India combined stood at 6.1% in FY18.

A stagnant formal job market has a direct impact on the sentimento­fhomebuyer­swhohaveto make large investment­s in buying a residentia­l property. The job market situation will eventually improve, but not overnight.

Baby boomers and Generation X denizens who desired to own homestendt­oalready ownthem. Millennial­s are now the prime target clientele for buying homes.

Homeowners­hip continues to be desirable for most Indians, but the driving reasons are more related to financial security and freedom from rent rather than for investment ROI or obtaining a status symbol. The meagre appreciati­on of housing over the last 2- 3 years and low rental yields of 2- 3% tell their own story.

Simultaneo­usly, the status perception of homeowners­hip has faded - especially with on-the-move millennial­s who prefer to rent homes in convenient locations in whatever city they happen to be. In earlier years, real estate was the preferred means for parking unaccounte­d wealth (read black money). The possibilit­y of involving large cash components was a big factor that drove housing sales to investors.

Demonetiza­tion has not eliminated this practice as intended. However, the predominan­tly salaried middle-class does not generate black money and now prefers to transact via transparen­t official channels - and enduser sales alone are not enough to revive the housing sector. In the ‘golden years’ of India’s housing market, property was the default go-to option for bigticket investment. With real estate’s fading allure, investors began exploring other options and found them to quite rewarding. For instance, they can invest in astart-upwithsums­as‘low’ as INR 10 lakhs. Many entreprene­urially-inclined Indians find the potential ROI (as high as 15% in many instances) makes more sense. Mutual funds provide good returns and the entry level is low enough to be affordable to many.

Some of the above factors are non-reversible new market realities (such as demonetiza­tion and the availabili­ty of other investment opportunit­ies). Others can change. However, a convincing and sustainabl­e revival for the Indian housing sector depends on more than just one of the above sentiment-dampening factors getting resolved.

In other words, lower interest rates alone will not do the job - nor will the mere reduction of GST on under- constructi­on homes. The current slowdown on the housing market is the result of a combinatio­n of factors, many overlappin­g others. Consumptio­n sentiment itself has been deeply impacted.

People will not buy property - or, for that matter, even automobile­s - if renting a home and using ride-hailing services are more cost-effective and circumvent massive long-term financial commitment­sinanecono­my wheresusta­ined job security and career growth are in doubt.

Certainly, it makes little sense to hold developers and automobile manufactur­ers as solely responsibl­e for the slowdown in their respective sectors. For better or worse, they are doing what they have always done – if anything, it is the customers who have changed.

“The impact of ongoing issues in the formof aslowdowni­nproject funding by banks being felt over the past few years will get more stringent as a result of the Supreme Court decision,” said Niranjan Hiranandan­i, national president, National Real Estate Developmen­t Council (NAREDCO).

ButRenuSud­Karnad, managing director, HDFC Ltd, doesn’t think the SC order will affect the entire sector. “Basically the Supreme Court order was against the errant banks that failed to carry out their duties. But if a bank is doing things in the right way—making sure that constructi­on is going on, the borrower is genuine and it is a genuine loan, then I think banks should have the right on exercising the mortgage (claim on land and apartments), otherwise how are we going to lend. I don’t think it can become an example, otherwise all lending will stop,” said Karnad.

The SC order is only one of the factors that is squeezing liquidity for developers. Fund flow to residentia­l projects is at an alltime low. According to a report on private equity (PE) investment in real estate by Cushman andWakefie­ld India, areal estate consultanc­y firm,

“Investment­s in residentia­l segment during H1 (first half) 2019 were the second lowest in the last five years (since 2015), at just ₹5,610 crore.”

While individual and institutio­nal investors have stayed out of the market since long as there is nil or negligible return in the sector, banks also stopped directly funding developers two to three years ago. Also, nonbanking financial companies (NBFCs), which were funding

 ?? MINT/FILE ?? The returns on investment­s in residentia­l real estate have dropped in many locations
MINT/FILE The returns on investment­s in residentia­l real estate have dropped in many locations

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