Why now is not a good time to buy new property

Real estate prices will have to fall more if the huge amount of unsold inventory of homes needs to be sold.

 |  6-minute read |   17-07-2015
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The real estate sector in India might be in for tough times in the days to come. A major reason for this is the fact that bank lending to the real estate sector has slowed down in comparison to the past. Lending by banks to commercial real estate had grown by just 7.5 per cent during the course of the year ending May 29, 2015. This is slower than the overall lending by banks at 8.5 per cent.

For a very long time lending by banks to commercial real estate had been growing faster than the overall lending. Take the case as on May 30, 2014. The overall lending by banks over a one-year period had grown by 12.7 per cent. The lending to commercial real estate during the same period grew by a much higher 17.8 per cent.

Further, the launch of new projects, another important source of finance for the real estate sector, has slowed down as well. A recent survey carried out by business lobby Associated Chambers of Commerce of India (Assocham) found that the total number of new project launches in the National Capital Region (NCR) had come down by 30-35 per cent in comparison to the last year. Builders need money to keep coming in. With two major sources of finance getting choked, they are being forced to cut prices to some extent.

There is more evidence coming out which buttresses the argument of the Indian real estate having finally started to unravel. Ambit Capital has brought out an excellent report on the Indian real estate scenario titled "Real Estate: The unwind and its side effects". In this report, analysts Saurabh Mukherjea and Sumit Shekhar provide further evidence that all is not well with the Indian real estate sector.

According to the Reserve Bank of India’s (RBI) All India Residential Property Price Index, housing prices have risen at a much slower rate in comparison to the past. The latest data point available on this index is as of end-December, 2014. The price rise between December, 2013 and December, 2014 had been 3.6 per cent on an all-India basis. Between March, 2014 and December, 2014 prices had been flat.

The Ambit analysts essentially point out that the situation on the ground is much worse than that. As they write: “Whilst the RBI’s Housing Price Index suggests that prices have moderated on a pan-India basis, data from property websites suggests a deeper slowdown in India’s large cities, with prices falling by 7-18 per cent year-on-year... In Delhi, our meetings with businessmen who live in south Delhi suggest that prices in this prime part of Delhi are down 20-25 per cent over the past year and transaction volumes have fallen sharply”.

Mukherjea and Shekhar also point out that home prices in smaller cities like Jaipur, Rajkot and Lucknow have fallen by 15-20 per cent over the last one year. This essentially corrects the misconception that fall in real estate prices is limited to the metropolitan cities.

In fact, the prices in some cities would have fallen much more than they have if the governments hadn’t increased the ready reckoner rates. “Starting January, 2015, the Maharashtra state government increased the ready reckoner rates (the price which is set by the state governments and which becomes the floor price for property prices) by 15-20 per cent in Mumbai, by 40 per cent in the suburbs and, on average, by 15 per cent across Maharashtra. Similarly, ready reckoner rates (circle rates) in Delhi were increased by 20 per cent this January. Kolkata too went through a ready reckoner rate hike,” write Mukherjea and Shekhar. The builders cannot sell below the ready reckoner price. But the buyers are finding this price too high. Hence, it is important that the state governments cut the ready reckoner prices and make homes more affordable in the process.

Further, investors have started to stay away from real estate. They have now started to understand that there is a huge amount of unsold homes that builders are sitting on and it will take a while to clear this inventory. Take the case of the NCR. The Assocham survey cited earlier revealed that “the NCR residential market is stuck with an estimated inventory of 1,70,000 units while another 90,000 dwelling units under construction are likely to be delayed for handover.” The survey was extremely comprehensive and collected data from nearly 120 real estate developers in Delhi-NCR.

Hence, there is a huge inventory build up. Over and above this, more new homes are being constructed which will keep adding to the inventory. This inventory needs to be cleared up for investors to be interested in investing in real estate again, as they were in the past. And until that happens the returns from investing in real estate will continue to remain low or even negative.

As the Assocham survey points out: “A large inventory is piling up despite prices correcting by over 20 per cent in the last one year, while there is a huge fall in the new projects being launched by developers who are hard-pressed for cash... The increase in inventory level is because of the falling demand from actual users as also the investors. Even the ready-to-move flats are finding few buyers, reveals the majority of the respondents.”

In spite of a fall in prices, demand continues to remain low. The survey points out: “The ticket price (of) three-bedroom, two-BHK and single room flats has seen correction by 30 per cent in Noida, 25 per cent in Gurgaon and 15 per cent in some key areas of Delhi but still, the demand stays subdued”.

What is worrying is that real estate is a huge employer of the unskilled labour force. And a slowdown in the sector will have a huge impact on job growth. As Mukherjea and Shekhar point out: “Real estate has been central to job creation and capex generation over the few past years. As per the NSSO (National Sample Survey Organisation), the biggest source of job creation in India over the past ten years has been the construction sector (construction sector has contributed to roughly 30 per cent of all the jobs created over the past decade). In this context, mass layoffs at construction sites seem to be resulting in wage pressure in the blue collar job market.”

For an economy, which is struggling to create economic growth, this is clearly not good news.

To conclude, real estate prices will have to fall more if the huge amount of unsold inventory of homes that has been built up needs to be sold. Hence, if you are a buyer looking for a good deal, it might just make sense to wait a little more and see how things pan out.

Writer

Vivek Kaul Vivek Kaul @kaul_vivek

Author of the Easy Money trilogy.

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