In the twilight zone

With property prices rising year after year for some time now, there has been a growing feeling among home-buyers that residential prices will never fall in India. The public sentiment has been, “The sooner you buy your home, the better it is because homes will only become costlier in the future.” The theory of continuing high property prices has been an easy one to support. First, real estate continues to be the biggest vehicle for savings in India alongside gold. That scenario seems unlikely to change in a hurry, with the stock market yet to become a preferred avenue to deploy one’s savings. Second, the black economy in the country is estimated to be just as big as the real economy, and property is black money’s best parking lot given the lack of transparency in dealings.

Nothing new here

New project launches witnessed a significant drop in CY15

The result: even if banks stopped lending, high net worth individuals — through formal and informal channels — provide liquidity to property developers, thereby, keeping them from lowering prices even if their inventory did not sell. Then again, the unlimited supply of liquidity, driven by foreign investors, provided another leg-up to the property rally. 

So, while developers have faced a cash crunch with formal sources of financing drying up, they have been able to go ahead with projects largely because of informal sources of funding. Unsold inventory has been rising rapidly, yet price correction did not set in. Finally, that cycle seems to be breaking.

According to a recent report by Ambit Capital, both demand and supply factors are conspiring to reverse the trend of the past few years. “We are seeing a broad-based real estate pullback, with prices correcting in most tier 1 and tier 2 cities alongside sharp drops in transaction and new launch volumes.” While banks have pulled back lending to developers, the black money bill has created fear among speculators. In fact, the directing of subsidies through direct transfer of benefits is keeping politicians from pilfering and handing the monies to builders to be deployed in real estate ventures. Plus, the knowledge that there is many years’ worth of unsold real estate inventory in most of India’s tier 1 and tier 2 cities is causing investors to further hold back purchases, notes the report.

If the black money bill makes informal financiers fearful, serious investors are holding back because of unimpressive returns. The report notes that the gap between gross rental yields and bank base rate of 8% is the highest among peer nations such as Philippines, Thailand, Indonesia and China. That makes real estate highly unattractive for investors. The median house price-to-income ratio has also increased in recent quarters, making houses unaffordable, according to RBI data. No wonder, then, that a broad-based correction is underway.

“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% Y-o-Y. Alongside this, we are also seeing a significant drop in transaction volumes,” states the report. Further, visits to five property registration offices in Mumbai suggest a sharp drop in the registration of new residential properties and data from property valuers in Maharashtra and Tamil Nadu suggests that transaction volumes have fallen by 10-15% per annum for three consecutive years now, notes the report. “Also, new launch volumes are down 40-80% on a pan-India level.