03 Feb 2016 21:22 IST

Who killed the housing market?

Property developers may be the prime suspects, adding more supply than the market can handle

The housing property market is gasping for breath. From the go-go days of a few years ago — when the sky was the limit for price gains and new homes sold out in hours — developers are now left holding millions of units of unsold property. For instance, the number of months it would take to drain the inventory of completed homes increased to nearly four years (47 months) for top markets such as the National Capital Region (NCR).

While the Indian economy is the fastest growing one globally and interest rates are easing, construction — a major rate-sensitive sector — is in a downturn. What gives? The stakeholders — developers, investors, home-buyers and the system that includes Government agencies and finance providers — have been impacted by the doldrums. So, who may have killed the housing market and what can revive it?

Developers’ dilemma

Property developers may seem like a prime suspects for the sector’s current troubles. After all, they have added more supply than the market can handle and priced it too high, beyond what buyers can afford.

But developers have their own cup of woes to drain and are taking steps. For one, they have cut supply. New launches were down 23 per cent in 2015 compared with a year ago nationally. Even in robust markets such as Bengaluru, residential launches touched a five-year low in 2015, says a report from real estate consultant Knight Frank.

While house prices are considered high and out of reach for many, data from housing loan provider HDFC shows otherwise. Affordability, measured as the ratio of average property price to average income, fell close to a decade low of 4.4 times in 2015. This was thanks to a sharper increase in income levels compared to home prices. For instance, in 2004, when houses were most affordable, the average home price and income were ₹15 lakh and ₹4 lakh respectively. While home prices have increased to an average of ₹52 lakh currently, average annual income has more than kept pace and stands at to ₹14 lakh.

Indeed, home prices have not kept pace with inflation in the last few years. For example, home prices rose, on average, by 1 per cent nationwide, and the best appreciation was 3 per cent in Ahmedabad, says a report from real estate research firm Liases Foras. Stagnant or falling house prices have not helped sales as buyers are on the sidelines. So developers are in a dilemma — cut prices with the hope of clearing inventory or hold up prices for the benefit of property investors?

No incentive for investors

Property investors, who flip homes, are sort of the market-makers in the housing segment. They buy from developers at the pre-launch stage and help fund the project. They take the completion risk and sell at a high price when the project is completed.

There are other types of investors too — those who buy and hold a home for a few years. While such investors earn rent and capital appreciation in developed countries, rents are not an attraction for home investment in India — rental yields are about 2-4 per cent. As a result, many investors buy a house and lock it up — about 10.2 million homes are lying vacant.

Investors are not, however, active in all markets. For instance, Chennai is mainly end-user driven while the NCR market had a higher share of investors in the boom years. And many of these investors have now left the market as there is a price correction — home prices in Gurgaon dropped 25 per cent in 2015 over a year ago, according to property consultant JLL.

While investors may have exacerbated price and volume reduction, they are only intermediaries. They will get back in the game when the market stabilises and they see profits – and that will happen only when home buyers step in and buy.

Buyers are not biting

Home buyers have been on the fence and are refusing to take the plunge. In addition to stable home prices, the effective home loan rates have dropped to about 3.8 per cent currently, helped by easing interest rates and tax incentives, as per HDFC data. But buyers are not biting. Sales volume dropped by 4 per cent in 2015, after a 30 per cent fall in 2014, according to Knight Frank and CBRE reports.

For one, while there are a lot of homes, they are not in the price category that works for buyers. Data from JLL show that over two-thirds of overall unsold flats in the Mumbai region are priced at over ₹1 crore. Margins are high in luxury homes and developers are eager to launch these. On the other hand, there is a shortage of 1.9 crore smaller units for households with average annual income of up to ₹2 lakh.

Buyers are also frustrated that developers are riding roughshod over them. Over half the real estate projects are delayed by over 12 months, with a fourth of them late by over three years, as per Liases Foras. Buyers have gone to court against large developers such as DLF and Unitech. But the process takes time, adding to the frustration. And the system is not helping either.

Stifling system

Buyers have no place to take their issues, as the support system for the property market is practically non-existent. There are no regulations that protect buyers and there is no regulator. The Real Estate Regulatory Bill, introduced in 2013 to bring about much needed changes, is still pending.

While buyers suffer from lack of rules in their favour, developers suffer from too many regulations. For instance, in Mumbai, up to 118 approvals may be needed before starting construction — ranging from the airports authority to the monuments authority. These are done serially and can take a few years, adding to the cost of the project as land is expensive. Land prices are very high in the city and development is not spread out due to lack of infrastructure such as roads, transportation, schools and healthcare outside cities. As a result, homes prices tend to go out of reach quickly.

So, while cycles are a natural part of any system, systemic changes are needed to give the housing market an upward push. It must include ways to protect buyers, increase transparency, reduce transaction costs, simplify approvals, improve compliance, provide funding to low-income buyers and develop infrastructure. These will build a strong foundation for the future.

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