Home truths: High loan rates and job losses threaten price growth

But if rate cuts begin and layoffs are limited, the housing market could repeat FY23 showing next fiscal

The residential real estate segment saw an average increase of 8 per cent in housing prices across the top seven cities over the past year, according to data from ANAROCK. However, the coming year may see a deceleration in the pace of price growth due to several headwinds.

Strong demand amid cost pressures

The price surge seen in the 2022-23 financial year (FY23) can be attributed to a multitude of factors. “Rising costs of inputs such as cement, steel, etc. — along with higher construction costs over the past fiscal year — compelled developers to increase prices,” says Anuj Puri, chairman, ANAROCK Group.

Robust demand was another contributory factor. According to ANAROCK Research, sales across the top seven cities touched a decadal high of 1.14 lakh units in the first quarter (Q1) of FY23. Demand for high-ticket size homes (above Rs 1.5 crore) was especially high.

According to Subhankar Mitra, managing director, advisory services, Colliers India, “There was significant pent-up demand from 2019 to 2021 and developers offered a variety of incentives to attract buyers.” Reasonably strong economic growth and job creation in 2021 and 2022 also fuelled demand.

The pent-up demand was primarily owing to negative sentiment among buyers earlier. Delay and non-delivery of issues had dented buyers’ confidence. “Many developers had gone bankrupt and buyers were afraid more would follow suit,” says Vikas Wadhawan, group chief financial officer, Housing.com.

The setting up of Real Estate Regulatory Authorities in the states from 2016 onwardS, and market consolidation in favour of large, branded developers helped repair the damage. “The presence of reputable brands has restored buyers’ faith,” says Wadhawan. The experience of staying locked up in one’s house for months during the pandemic also accelerated demand. “Those who lived on rent wanted a house of their own. And those who already had a house wanted to upgrade to one with extra rooms for work from home and children’s studies,” adds Wadhawan.

Ritesh Mehta, head, west & north, residential services, JLL, points to two additional factors. “Stamp duty waivers by various state governments and infrastructure development, both civil and social, also provided a fillip to sales,” he says.

Challenges ahead

The pace of price rise may moderate in the near future. “We expect prices to rise by 3-5 per cent in FY24,” says Vivek Rathi, director, research, Knight Frank India.

The repo rate has risen by 250 basis points since May 2022. “Home loan rates have increased by around 170-180 basis points. This has reduced buyers’ affordability by 13-14 per cent. While higher home loan rates have impacted demand in the affordable housing segment, they have had a lesser impact on the mid-to-premium housing segment,” says Rathi.

Puri fears a possible rate hike by the Reserve Bank of India in the near future (due to inflation concerns), alongside rising prices (due to cost pressures) could dent growth over the next two quarters.

Rathi says that if the rate cycle turns this year, it could provide a fillip to the housing market.

Layoffs in the tech and start-up world also pose a threat. “Slowing global growth could lead to layoffs in India. More buyers could defer the purchase decision in such a scenario,” says Mitra.

Restoration of stamp duty rate cuts by state governments has also raised the total cost of acquisition.

What should you do

Go ahead with this big-ticket purchase only if you are sure of your ability to meet this commitment. End-users should preferably opt for a ready-to-move property to circumvent development risk. If you go for an under-construction property, then stick to quality developers with robust balance sheets and strong execution capability.

Investors shouldn’t enter residential real estate expecting quick gains. “While home loan rates have risen, the rental yield from housing remains low. You will only be able to make money in this asset class if you are prepared to wait for a gradual increase in prices over the long term,” says Rathi.

Mitra suggests handing over your property to a player in the co-living space for better returns while Mehta suggests investing in distressed assets (such as those auctioned by lenders).