Despite of Coronavirus outbreak, there was a slight increase in home sales during the January-March 2021 period, India’s eight prime housing markets saw almost flat price growth.
However, the housing markets of Ahmedabad and Hyderabad remained exceptions, with both cities seeing a 5% annual increase in prices. This growth, particularly in Ahmedabad, could be attributed to the fact that average property rates in this market are already low when compared to other cities.
Even after an economic recovery and supportive policies, house prices in India’s major cities will barely rise in 2021, according to a Reuters poll of property analysts conducted earlier this year.
According to a January 2021 poll of 13 analysts, average house prices in the country will rise by 1.3 percent this year, with a 4.5 percent increase expected in 2022.
The poll also predicted that property values in Mumbai, Delhi, and the National Capital Region would remain stable in 2021, compared to contractions of 3.25 percent, 3.0 percent, and 2.5 percent, respectively, predicted in September 2020.
Despite the fact that the stress caused by the Coronavirus pandemic has had an impact on India’s key residential markets, the average rates of new projects have remained stable.
When compared to the same period in 2019, the weighted average prices of properties in leading markets such as NCR and Mumbai showed flat growth in the October-December period of 2020.
Prime market did not fall in price
In spite of the Coronavirus outbreak, the prime market did not fall in price during this period. The rate of new housing projects in Ahmedabad and Hyderabad is currently 7% and 5%, respectively. Pune, too, experienced a 4 percent increase in prices over the previous year.
Indicators forecast that inflation will stay range-bound as India’s economy slowly recovers. GDP levels will remain well below pre-pandemic levels because of financial sector weakness and supply-side scarring.
The rating agency expects India’s gross domestic product (GDP) to grow by 11 percent in FY22 (April 2021 to March 2022), after falling by 9.4 percent in FY21 due to the Coronavirus outbreak (April 2020 to March 2021).
“Supply-side potential growth will be affected by a slowdown in the rate of capital accumulation – investment has recently fallen sharply and is likely to see only a subdued recovery,” the report added.
Housing affordability in India
While muted price growth, along with several other factors, has greatly increased housing affordability in India, low yields may be detrimental to the investor spirit and impact foreign investment volume in the country, particularly from the NRI segment.
State governments are also helping to increase housing affordability. Delhi, for example, announced a 20% reduction in circle rates on February 5, 2021. These temporary reductions aim to reduce housing costs considerably in the national capital.
Because of this, the only segment of the market that has grown despite the general slowdown is home loans. Current rates for home loans are 6.65 percent by Kotak Mahindra Bank and 6.7 percent given by SBI.
ICICI Bank charges 6.80 percent on home loans, while HDFC offers home loans in any amount at 6.75 percent annually.
Cost of supply materials has increased
Projects are likely to be delayed due to the Coronavirus outbreak as the supply of building materials that India imports from China is hampered as a result of the pandemic and rising tensions between the two countries. The situation would have a greater impact on premium-luxury housing projects that rely heavily on supplies of fixtures and furnishings from China, the country where the source of the contagion has been identified. The time lag will not only cause housing projects to be delayed, but it will also increase the overall cost of project construction because builders here will have to rely on alternative sources to meet their building requirements.
‘Make in India’ may benefit from this difficult situation in the long run, but short-term pain for developers is inevitable. In this situation, lowering prices is hardly the solution. However, the government may implement policies that make it more appealing for buyers to invest in real estate. It also boosts real estate, the country’s second-largest job creator, by exempting unsold inventory from taxation.
As holding costs rise and unsold inventory drops, prices may fall or not in the current crisis. It would be premature to forecast the magnitude of price changes in the near-to-medium term.
Interest rates at record low, home-buying to become affordable
The RBI has reduced the repo rate to 4%, making borrowing more affordable for home buyers. As a result, mortgage interest rates are already as low as 6.95 percent. Previously unknown effects of COVID-19 will act as a motivator for buyers to invest in properties.
It may extend Section 80EEA benefits further to assist first-time homebuyers since it already extended them until March 2021. Consumer anxiety over impending job loss is likely to persist even after the worst has passed. The government will have to continue providing assistance until that time.
Due to the weak job market and cheap home loans, developers are likely to make some corrections. Property investments could actually rise if developers offered a discount.
Reducing the price of a property would make tenants more willing to purchase it. Renters used to prefer buying over renting due to cost savings. Current tenants cannot afford to buy a home, but are planning to do so within two years.
Stamp duty correction
In the aftermath of the Coronavirus outbreak, some states have announced reductions in stamp duty—the tax that buyers must pay to the state government as a percentage of the transaction value—in order to boost buyer sentiment and lower the overall cost of purchase for buyers. For example, Maharashtra has announced a six-month temporary rate reduction. The stamp duty rate in Mumbai (India’s most expensive property market) is 2%. Karnataka has also reduced the stamp duty on properties worth up to Rs 30 lakh to 3%. Madhya Pradesh’s government also announced a 2% reduction in the stamp duty on October 1, 2020.
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What should an investor do?
Some of India’s megacities have seen significant corrections in housing prices. In the near future, the real estate market won’t appreciate much, but now is a great time to buy. The prices are unlikely to fall any further, so this could be a great opportunity for buyers. Despite the record low-interest rates on home loans, buyers and investors can also obtain affordable housing financing.