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Perspective

Real estate correction underway
Ambit Capital believes the current correction in real estate will have collateral damage

With property prices rising year after year over the past few years, there has been a growing feeling among home-buyers that house prices will never fall in India. The public sentiment has been, “Sooner you buy your home, the better it is because homes will only become more costly 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 with lack of transparency in dealings.

The result: even if banks stopped lending, high-net-worth individuals, through formal and informal channels, provided 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 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 broadbased real estate pullback, with prices correcting in most tier-1 and tier-2 cities alongside sharp drops in transaction and new launch volumes.” (see: Here, there and everywhere) 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 curbing 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 hold back further purchases, notes the report.

If the Black Money Bill makes informal financiers fearful, serious investors are holding back sheerly because of how unimpressive returns have become. The Ambit report notes that the gap between gross rental yields and bank base rate at 8% is the highest among peer nations like Philippines, Thailand, Indonesia and China (see: Mind the gap). That makes real estate highly unattractive for investors. Besides, the median house price to income ratio too has increased in recent quarters making houses unaffordable (see: Out of budget), according to RBI data. No wonder, a broadbased correction is already 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% YoY. Alongside this, we are also seeing a significant drop in transaction volumes,” says the report (see: Following the lead). 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 Tamilnadu suggest 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.” (see: Nothing new here). 

You can read the entire Ambit Capital report here

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