2015 Real estate in India                                                    

Rising interest rates, tighter lending norms, poor sales--they all add up to an imminent slump in property prices It is a frequent motto used to emphasize the importance that a location has on the value of a real estate property. The heart of the message is clear -- if you pick the right spot to invest your property in, you can be rewarded with a handsome return on investment.

The Indian economy is in an interesting stage right now. On one end of the spectrum, signs are pointing towards an economic surge. The Sensex hit an all-time high a week ago, the RBI seems to be making all the right moves to curb inflation and bring stability to the rupee and analysts can be frequently heard commentating that finally it's a "trading market". This means the economy is picking up, the share market is ripe for investments and therefore investors and traders can take advantage of the opportunities being presented to earn profits

Property prices in major Indian cities, including Mumbai and New Delhi, are set to slump by as much as 30% in the next three-six months as rising interest rates and tighter lending norms have led to a sharp drop in demand for realestate  or homes. "Softening in prices would begin in a month or two if sales continue to be low.

With the Sensex hitting new highs and RBI Governor Raghuram Rajan promising all sorts of ground-breaking changes to propel the economy (on 6th November, the RBI unleashed a far reaching set of new rules that will allow foreign banks to enter India's protected domestic environment), you would expect real estate prices to be surging upward. And yet, this is not what is happening.

The Reserve Bank of India (RBI) has signalled borrowing costs will rise further after increasing interest rates seven times in the past year to curb price rise. It has also tightened lending norms for the purchase of property to rein in surging prices. Even as the supply of residences outstrips demand, property developers, who need to repay an estimated Rs14,000 crore to banks by the end of the financial year, are facing the spectre of loan defaults as dropping stock prices make it difficult for them to access equity markets, and banks tighten lending.

Usually, before a bubble "bursts", price rises begin to slowly drop. This is currently being evidenced across the country. The National Housing Bank's Residex, which tracks housing prices across 26 prominent cities in India, showed that in the April-June period, 22 cities saw a fall in prices compared to the previous quarter.

 

 

In November, RBI asked lenders not to loan more than 80% of the value of a property priced at more than Rs50 lakh. It also asked banks to increase the risk weightage of property loans of more than Rs75 lakh to 125%, making it more expensive to lend. Risk weightage assigns the minimum amount of capital that lenders have to maintain, as a percentage, depending on how risky a loan is.

However, a quick way to see whether a country's economy is improving is to simply look at its real estate prices. If real estate sales fall, then real estate prices eventually fall in tandem. This then reduces the value of all homeowners, whether they are looking to actively sell or not. The result is that there is a reduction in home loans granted to those same homeowners. Finally, this reduces consumer spending which results in reduced GDP.

So all in all, real estate prices or sales are a great indicator of a country's economy.

 

"This was an additional factor along with the price rise which directly impacted investor sales in the higher end of the residential market," said Chattopadhyay.

"The loan-to-value ratio being capped at 80% effectively reduces the purchasing power of a loaner, he may have to delay his purchase decision, leading to a fall in incremental sale volumes."

Mumbai and Delhi saw prices drop by 0.5 per cent and 1.5 per cent, respectively. While properties in Chennai dropped by 2.3 per cent and properties in Kolkata dropped by 4.1 per cent.

When looking at nominal numbers, which is not comparing to the previous quarter when adjusted for inflation, out of the 15 largest cities in India, house prices actually fell in 11 out of the 15 cities in the second quarter of 2013. This is absolutely alarming. For example, Kolkata saw a dramatic -12.9 per cent drop in prices when adjusted for inflation, and Surat saw a -11.5 per cent drop in prices when adjusted for inflation. Here is a table that demonstrates the drop in prices between 2012 and 2013.

 

The drop in residence sales has led to an increase of inventory in several cities. Mumbai has been the worst hit with about 88,000 unsold flats in the metropolitan region. About 25,000 of them are within the city limits of India's commercial capital, according to a survey of 2,400 housing projects in Mumbai, conducted by property researcher .

 

Data from across India shows that only 15% of the home deals struck between April and September were at prices less than Rs2,500 per sq. ft, suggesting it is now difficult to buy even a 1,000 sq. ft house for less than Rs25 lakh in most cities. As a result, volumes have begun to slow and new bookings reported by major developers have been lower than expected, Credit Suisse said in their report.Builders have started negotiating across the table and are willing to cut prices by 10-15%, but prices need to fall further to become affordable depend projects to projects and builder.Some prospective buyers have now decided to delay their purchases until prices fall.

The RBI has been consistently raising the repo rate, which is the rate that banks are charged to borrow from the RBI- in recent months. These past few days, major banks such as State Bank of India and HDFC Bank raised the rates to obtain loans to purchase houses, and the trend is unlikely to stop as the RBI is expected to continue raising rates to fight inflation.

This all translates to bad news for the real estate market. Home-owners will have a more difficult time obtaining loans to purchase houses. Already, cities such as Mumbai are facing a downturn in the real estate market, despite the mass public perhaps not being aware about it.

Usually, before a bubble "bursts", price rises begin to slowly drop. This is currently being evidenced across the country. The National Housing Bank's Residex, which tracks housing prices across 26 prominent cities in India, showed that in the April-June period, 22 cities saw a fall in prices compared to the previous quarter.

 

Date:15-08-2015