In spite of top Indian cities reportedly being plagued by over-supply of housing units and lack of demand, prices of property are truly on the rise, thereby defying the basic economic rule where selling prices do not rise and are seen to fall whenever any market is over-supplied and there is lack of demand. The Ministry of Housing launched a new index earlier in July, 2017 and this is called the NHB Residex, which will be tracking trends in terms of housing prices across 50 Indian cities.
The Ministry has also claimed that this new index furnishes proof that demonetization has not impacted the housing market majorly in India. This claim is backed by the trends reported by the Residex. As per the information compiled by the index, a whopping 32 out of 50 Indian cities witnessed a rise in housing prices while 13 cities witnessed stable price trends for the twelve months till March, 2017. Only 5 Indian cities witnessed a decline in housing prices. Big markets also witnessed positive trends. Home prices went up by 44%, 41%, 33% and 37% for Pune, Mumbai, Chennai and Bangalore for the period between FY13 to the first quarter of FY17.
However, this price rise is at odds with the reports of unsold residential inventory, weakening demand and the huge impact of demonetization and RERA on slowing down home sales across the country. Knight Frank India had previously reported that sales of residential housing units in the top 8 Indian cities went down by a massive 48% for the second half of 2016 in comparison to the same period last year. In January-June, 2017, home sales did witness a slight revival but remained 11% lower in comparison to the levels witnessed in 2016.
According to Liases Foras, builders were sitting on a whopping 46 months of housing inventory in September 2016 on an all-India basis. Even if they did not opt for new project launches, they would need at least 4 years to liquidate existing housing stocks according to the industry researcher. Excess inventory in any sector normally leads to push selling by sellers. There are three possibilities, which can support the findings of the Residex.
The first is that home ownership is still a major aspiration for a large section of citizens and hence new buyer categories may have emerged. Lower interest rates may have attracted more first time buyers to avail of home loans for purchasing residential housing units. The growth of 12% in home loan disbursements by banks in FY17 according to data supplied by the RBI, indicates this trend.
The second possibility indicates that lower demand for premium homes may have been offset by the rise in demand for affordable housing units. Over the last few years, most of the activity witnessed in the housing market covered premium homes in metro cities which were priced over Rs.75 lakhs on an average. There was a shortage of housing units priced below Rs.25 lakhs. The Government’s package for boosting affordable housing with a subsidy and developer incentives may have led to an increase in supply of low cost housing units. The report from Knight Frank also talked of how homes priced up to Rs.25 lakhs have seen an increase in terms of new launches, accounting for 36% of total launches in H1 2017 in comparison to 17% just a year earlier.
Thirdly, it is possible that several sellers have more staying power than anticipated due to political/private equity funding, allowing them to wait it out till buyers come back. The Indian housing market is already fragmented across innumerable micro-markets. Housing prices vary hugely across cities in the same state, localities in the same city and even neighborhoods within the same locality. In the market where prices are low, sellers do not jump into deals, thereby leading to a lower number of transactions. The property market did witness lower deals in the last year with builders refraining from reducing prices and buyers waiting it out till they found better bargains. New launches were also on hold for several real estate developers in the country.
The NHB Residex will now help buyers with regard to getting a benchmark for the assessment of list prices that are quoted by developers in these Indian cities. The Index is expected to cover more cities and with its initiatives, the Indian housing market should become more transparent in the long-run.
