Homebuyers never had it as good as they did in 2021, after the second wave of the Covid-19 pandemic ended. Forced to say indoors during the lockdowns, they flocked to the residential market in droves, many looking to buy larger homes—a result of prolonged periods of working from home.
There were also other factors that enticed homebuyers since late-2021, such as some of the lowest home loan interest rates in recent times and government sops like registration fee waivers and stamp duty cuts. Additionally, as the market was recovering from a prolonged depression, home prices had remained stable—encouraging buyers to invest.
Take Vinay Sharma, for instance. The IT professional used to reside in Gurugram, in a 2BHK rented apartment with his family. Since the pandemic led to him working from home, he chose to buy a 3BHK apartment in Noida. Apart from the lucrative interest rate, the work-from-home flexibility allowed him to choose Noida over costlier Gurugram, where his office is. Sharma was not just happy to have bought his dream home, he was even more delighted that his EMI outgo was just 35 per cent higher than the rent he paid earlier.
Such customer delight made realtors and homebuyers a happy lot so far, after a tumultous past decade. For several years in the 2010s, homebuyers were hit by a spate of delayed projects and multiple other issues—even fraud by some developers—and buyer confidence was at a low. The introduction of the Real Estate (Regulation & Development) Act in 2016, followed by GST in 2017, restored the confidence somewhat. However, legacy issues continued to haunt the sector, keeping it in a downward spiral till the arrival of the pandemic. The revival in demand post-pandemic provided realtors with much-needed relief, while homebuyers made the most of the favourable conditions to buy a home.
But good times usually don’t last long. And that is exactly what is happening now for both homebuyers as well as real estate developers. This is because come 2023, the market dynamics have changed significantly. Sops offered by different state authorities have run their course. Home loan interest rates have begun to surge—they are nearly at pre-Covid-19 levels—and developers are steadily raising prices of homes as raw material costs and the overall cost of construction have surged. “The fragile global supply chain, supply side shocks and soaring inflation had a cascading effect on raw material prices. The industry also faced issues of cartelisation and a migrant labour crisis since the onset of the pandemic. The withdrawal of fiscal stimulus like stamp duty waiver also resulted in a higher cost of acquisition,” says Niranjan Hiranandani, MD of realty major Hiranandani Group and National Vice Chairman of industry body NAREDCO.
The rising cost of borrowings has also added to the burden of developers. As a result, the real estate sector has witnessed an average increase of 5 to 8 per cent in property prices across key markets in India in the past one year, says Hiranandani.
The real cost of acquiring a home, however, has jumped much higher in the past three quarters. This is because of a number of reasons. A key factor is rising home loan interest rates. Record low home loan rates had brought buyers back to the residential market. But with the Reserve Bank of India (RBI) raising the repo rate, or the rate at which it lends to banks—to the tune of 2.25 per cent since May 2022—average home loan EMIs have jumped by more than 18 per cent (See graphic ‘Lighter Wallets’). According to Hiranandani, the consecutive hikes in interest rate have “led to increased cost of credit, construction and consumption with proportionate impact on the operative profit margins of the developers. Also, the market witnessed consolidation trends in order to deleverage and maintain a healthy balance sheet”. The affordable housing segment—homes priced below Rs 45 lakh—that operates on thin margins, has been hit the hardest because of the rising costs of development, he says.
The shivers have been felt by leading players in the affordable housing space. According to Pradeep Aggarwal, Founder & Chairman of Signature Global—one of the leading affordable housing players in the country—while 2022 has been a good year in terms of home sales, rising costs are becoming a major concern. “In the past couple of years, the cost of construction has increased significantly. Margins have collapsed drastically, especially in the affordable housing segment,” he says, adding that 2022 saw a significant increase in mortgage rates. “We believe that this may have an adverse impact on housing demand in 2023,” he adds.
The impact of the recent changes has been witnessed across the affordable housing sector, which has seen lower sales and new launches. Data from industry analyst PropTiger suggests that the share of affordable homes in home sales shrank by 11 percentage points in January-September 2022 since the pre-Covid-19 days. In 2019, affordable homes formed 51 per cent of overall home sales in the country’s top seven real estate markets. That came down to 40 per cent in the first nine months of 2022. This has resulted in a more cautious approach by developers while coming up with new projects. While in 2019, over half of the new housing launches were in the affordable segment, that share fell to 29 per cent in the first three quarters of 2022.
Industry leaders like Aggarwal want the government to act to address a further slide in demand in 2023. “To sustain the demand, which is also essential to support the economy, the government should announce homebuyer-friendly tax sops in the upcoming Budget. State governments should also think of waivers in stamp duty and registration fees… to keep the demand going. We also urge the government to look into the per sq. ft selling price fixed years ago under various affordable housing schemes. To support and achieve the ‘Housing for All’ mission, the government should enhance the price cap under affordable housing schemes,” he says.
While the impact of the prevailing conditions has been comparatively lower on the rest of the real estate market so far, recent analyses by industry expert groups such as JLL and Colliers suggest that acquiring a home is increasingly becoming difficult for average buyers. According to JLL’s home purchase affordability index, after touching its peak in 2021, homebuyers’ affordability in the country’s key markets is slipping. In India’s largest market Mumbai, for instance, homebuyers’ affordability has dropped by 8 per cent in 2022 over the previous year. In the second largest market, the National Capital Region of Delhi, the fall is greater, at 10 per cent year-on-year. While in Mumbai the average affordability may remain the same in 2023 as in 2022, in Delhi-NCR it may drop another 3.2 per cent. In Bengaluru, affordability has fallen by over 9 per cent in 2022 and is estimated to slide further in 2023, says JLL.
“Affordability was at its highest in 2021 with decadal low interest rates, attractive prices and household income recovery all coming together to create the perfect environment. In 2022, we have seen affordability gains mitigated as inflationary pressures have caused developers to pass on the rise in input costs on to the buyers,” JLL noted. While the JLL analysis does not take into account the RBI’s latest rate hike of 35 basis points, Shishir Baijal, Chairman & MD of property consultant Knight Frank India, says this will “further impact EMIs and reduce home affordability”.
Apart from the rising cost of home loans, the steep rise in the costs of construction materials, labour and logistics have forced realtors to raise prices, thereby risking losing buyers. Data from real estate advisory Colliers shows that the cost of materials, which forms two-thirds of the overall construction cost—has jumped 32 per cent since end-2019. Coupled with the rising costs of labour and logistics (that are directly linked to fuel prices), the average cost of construction of a residential home has surged by 21 per cent in the past three years—from Rs 1,900 per sq. ft in November 2019 to Rs 2,300 per sq. ft in November 2022, according to Colliers.
Irfan Razack, Chairman and MD of Bengaluru-based real estate major Prestige Group, says the situation is “dangerous” since both factors affecting home prices—price of land and the cost of construction—are surging simultaneously. “Be it steel and cement or smaller components like PVC materials, windows, doors or tiles, every component has seen prices rise. And so have labour costs,” he says, adding that additionally, the cost of getting approvals has increased, since many larger cities have linked it to the guideline value, which is the estimated market value of the property as per records maintained by the government. “A major dampener is that the interest rates are also going up. So, the cost to consumers has risen significantly,” says Razack.
The recent challenges have placed most developers in a situation where any move they make may adversely impact them. Prestige, for instance, has chosen to keep its customers happy rather than maintain healthy margins. “We have to walk a tightrope to make sure that the pricing is right, margins are not badly impacted and at the same time the product remains affordable so that customers don’t shy away… If demand suffers and sales go down, then we have to go for construction finance, which would ultimately increase costs and lead to risks of getting stuck in spiralling debt,” says Razack.
According to Ramesh Nair, Chief Executive Officer, India and MD, Market Development, Asia at Colliers, the cost of construction materials would remain volatile in 2023 and the future looks less certain than in 2022. Realtors say another 5-10 per cent hikes in home prices are likely because of the elevated prices of commodities. Therefore, developers may opt for a wait-and-watch strategy till prices cool, says Nair, which may, in turn, impact the supply of homes. As a result, prices of existing projects on offer may go up, even if the demand for homes goes down in 2023.
Sharma seems to have bought his dream home at the perfect time. As for other homebuyers, buying a home is set to become more difficult, with no immediate relief in sight.
@arndutt
