Housing market in India is booming. Right? This is what industry narrative is being pushed through. Track2Realty takes a booming market test to find that the sector fails through the fundamentals of economic rationale.
I meet a number of stakeholders across the built environment of Indian real estate. One common narrative that has gained ground within the built environment over the years is that “this is the best time to buy a house.” Mind you! This narrative was being pushed through the throat even before Covid. Even though the real estate market in general and the housing market in particular has been going through a turbulent phase, the narrative has never changed its course.
I often wonder if this is the best time to buy a house, then when was the worst time. Isn’t it relative that when there is best time it has to be in comparison to the worst time? Good or bad is always relative and doesn’t stand in isolation.
It is not that the leading voices of the real estate power play who engage with the policy makers don’t know the ground realities. A journalist questioning their narrative, or should I say influence peddling, might appear to be a “Negative” force, the fact remains that they also crib about an impending crisis when dealing with the policy makers to extract their due or undue.
This raises a fundamental question as to what are the signs of a healthy real estate market. What are the fundamentals that support or reject the narrative of best time to buy. Let’s take a booming market test:
Booming job market
Higher job hopping rate is more often than not good news for the economy and the real estate business. While at a micro level it may affect the individual businesses, it is actually the sign of a market where the young demography is getting jobs and senior pros are constantly getting better opportunities. Historically, the real estate market has weathered even the double digit interest rate & inflation with even higher housing sales when the inflation has been growth driven inflation. The Indian housing market has been witness to 13 interest rate hikes on home loans in 2011. The home loan rate spiked from 10.25% in 2008 to 13% in 2012 but the period was also witness to consistent growth of market transactions. Reason is the job market.
Real estate today fails this booming market test.
Demand exceeding supply
One of the fundamental reasons why the Indian developers could sell a future product with compromised quality is that the demand far exceeded supply when the government agencies could not meet up with the housing demand. The private developers encashed upon this supply deficit and the Indian housing market was witness to a tectonic shift 2004 onwards.
Today with more than 7 lakh standing inventory that would take no less than 44 months to sell by the most optimistic assessment the demand & supply equilibrium doesn’t indicate a booming market.
Real estate clearly fails on this test.
More new launches
More the demand and there are more product launches. That is how businesses across the board operate and real estate is no exception. In the last 3-4 years, the new launches have been few and far between. Only a handful of national level developers with proven brand goodwill have been able to launch new projects. For the large universe of the developers, the new launches are more of a liability where interest burden could not be eased with the flow of buyers’ consistent receivables. Not every developer can afford to launch and sustain till buyers show interest after project completion.
Lesser new launches also indicate a bearish housing market and fail the test.
Appreciation higher than borrowing cost
The Indian consumers have historically been silent on the quality of housing. The silence is not borne out of their satisfaction but economics of FOMO (Fear of Missing Out). When the pace of appreciation has been over 15 per cent year on year the buyers’ bargaining space had been limited. With lower borrowing cost compared to appreciation, the housing was being absorbed more of an investment. The developer always had the upper hand in the wake of buyers’ protest. He could easily refund and even with interest being paid he could resale it at a higher price.
Today, with appreciation in the range of 1-3 per cent and the borrowing cost around 6-7 per cent, it fails the booming market test.
Higher rental returns
World over the gap between the borrowing cost and the rental returns define the direction of the housing market. The lower gap not only limits the buyers’ risk profile but also compensates for the lack of capital appreciation. The Indian housing market still has the maximum gap between the borrowing cost and the rental returns in the world. With around 500 basis points gap, it is not a prudent decision to buy a house when the capital appreciation too, if any, can accommodate only 200-300 basis points.
Real estate fails on the booming market test here.
Lesser distress sale
Secondary market is a key indicator of the health of housing market in any given city. It is a litmus test of the actual demand & supply since the primary market could absorb the variables due to developers’ holding capacity. Today, there are very many distress deals available in the secondary market. It is a completely buyers’ market in the resale transactions. The Covid has made a huge dent on the budget of many middle class households and reeling under job losses and/or salary cuts many of the buyers are selling their properties out of distress.
The industry narrative only talks about the property registrations but doesn’t define how many deals were there in the resale property. A distress sale in the secondary market is also affecting the primary market.
Real estate fails on the given test of booming market on this parameter as well.
Pass or fail?
It is pretty clear that Indian real estate doesn’t pass even a single test of a booming market. This raises a fundamental question as to whether the false narrative of “best time to buy” is in any way helping the sector. Unfortunately, the stakeholders with their self-limiting perception are revealing more than what they could conceal as far as the bearish market realities are concerned. Will they actually take such an honest market test and think of any possible course correction now?
Ravi Sinha
#RaviTrack2Media
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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