Isn’t it ironic that in a country where housing shortage is at the core of policy debates, housing surplus in top Indian cities is juxtaposed to that. As a matter of fact, the reality of unsold housing units poses an even greater degree of imbalance than the housing shortage. But then unsold inventory is a symptom and not the cause of malaise in the housing market of the country. A Track2Realty report.
For a better understanding with statistics, India’s urban housing shortage itself is more than 30 million units. In contrast, the number of unsold inventory is around 10 lakh units in top 10 cities only. This number could double up in the 30 key cities of the country. The sales velocity of Indian housing has not gone up by 2-2.5 lakh units in a given year. Add to it the number of new launches year after year and you have a confused housing market where the predominant reality is always about unsold inventory.
This raises certain fundamental questions:
What are the reasons for unsold housing in the Indian market?
Is it more of an economic slowdown or there are inherent flaws in business calculations?
What has caused a demand & supply mismatch in the housing market?
Should there be lesser new launches to maintain the demand & supply balance?
Decoding reasons
There are more questions than what anyone could vouchsafe at this point of time. However, on-ground realities suggest unsold inventory is more of a self-inflicted injury on part of the developers. High housing demand and even higher standing inventory clearly suggests there is a demand and supply mismatch. The developers, instead of focusing on the market demands and cater to that have focused more on availing the maximum permissible FAR and density norms. So, a market that could easily absorb 1.5-2BHK is flooded with 3BHK and 4BHK offerings.
There are other developers who misread the horizontal growth potential of the city and they ended up with huge inventory on the periphery locations. With no social and economic infrastructure there are many ghost cities waiting for the occupants today. Similarly, some of the developers were confronted by the market with high input costs which didn’t facilitate a drop in asking prices. This led to a status quo in the market. Many ended up holding the inventory beyond their holding capacity. The pandemic also affected the market as homebuyers became wary of making a purchase in times of uncertainty.
Then lower rental yield in the range of 2% has always been a catalyst to the Indians’ reluctance to invest in additional properties. Till the time there had been a double digit capital appreciation the Indians preferred property as the best asset class to park the money. However, the slow pace of appreciation (to the extent of inflation adjusted depreciation) made the Indians wary of investing in more than one home.
Affordability, of course, remains the number one cause of unsold housing inventory in the country. In terms of the economic rationale, the thumb rule of housing purchase world over is that the price should not be more than 5 years of gross income. The second simultaneous condition is that the EMI should not exceed 50 per cent of the take home salary. Another school of finance suggests that the EMI for the given house in the next 20 years should be equal or lower to the rent paid for the same house during the given period of time. With this affordability test, a vast majority of the Indians, even in the top 10 cities of India would never be in a position to buy the house.
Expert view
Vimal Nadar, Head of Research, Colliers India points out that the housing sector was going through a slowdown over the last few years. This was led by various reasons. Developers focused on launching housing units in the mid to high-end segment, while the majority of the demand was in the affordable to mid-range. This led to an affordability mismatch, leading to high unsold inventory in the market.
“Prior to the enforcement of RERA in 2016, the housing sector was fragmented with lack of transparency. Homebuyers often faced severe delays in the possession of their homes, with little option for legal redressal. This led to homebuyers being wary of buying from lesser-known developers. Moreover, demonetization also led to a further slowdown in the housing sector. Homebuyers adopted a wait & watch approach expecting to see a fall in housing prices,” says Nadar.
Ashish Narain Agarwal, Founder & CEO, PropertyPistol.com believes the factors causing unsold housing inventory are many. They could not be only attributed to economic slowdown or demand & supply mismatch. Factors like legal issues associated with properties, unsuitable location, unreasonable pricing, etc. can also impact the sales of homes.
“India’s real estate sector which was seeing a healthy revival post the pandemic has very recently met with unpredicted ongoing events that seem to deter the pace of growth for the sector. Considering some recent research reports on residential sales and also our internal customer data showing a steady increase in home buying in the past six months, it is quite evident that sales across the residential segment has not been hampered to a great extent. This can be attributed to availability of homes across segments, people’s desire to own homes, and their increased purchasing power,” says Agarwal.
Lack of depth?
Post the pandemic, there has hardly been any innovation in the design & layout or strategy that would suggest developers have become more cognizant of home buyers’ preferences and needs. Launches are more often than not in sync with the market in terms of ticket size, design, amenities etc.
Should there be lesser new launches to maintain the demand & supply balance? Most of the analysts do not think that reducing the number of new launches will be a practical solution to bring a balance between demand and supply of homes. Demand for homes is very subjective in nature and the reason for home buyer’s preference towards a property and disinterest towards another may vary.
In a nutshell, the market is defined primarily in terms of the ability of someone to pay for what you have produced for them. Unsold inventory clearly suggests the housing market fundamentals are positioned otherwise.
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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