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Low interest rates, steady home prices to help boost Indian residential market

Improving home affordability amid 15-year-low interest rates and stagnant prices in India could help kick-start a recovery of the nation's residential property market, although a sustainable rebound will require the economy to grow more strongly again.

India's housing market experienced its worst slump in at least a decade, with sales of new homes in the top eight cities down to 59,538 in the January-to-June period, almost half the 116,576 units sold in the previous six-month period, according to data from the Indian unit of Knight Frank LLP. The number of new homes launched in the period also dropped sharply to 60,489, from 112,150 in the July-to-December period of last year, the data show.

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"We believe the residential market is in the cusp of its initial phase of recovery, with lowest home loan interest rate and realistic valuation of properties. However, this recovery may be a prolonged one and is likely to be aligned with improvement in economy and employment scenario," Ramesh Nair, CEO and country head for the Indian unit of real estate consultant Jones Lang LaSalle Incorp., said in comments emailed to S&P Global Market Intelligence.

With the economy in the doldrums and stock markets becoming volatile, real estate has emerged as the preferred investment class in India, with more than half of respondents in a survey by JLL saying they would consider buying a new house in the next six months. The survey showed that 91% of the respondents wanted to buy a new home versus renting, and 67% believed that buying a house is a necessity, not a luxury.

"Real estate has emerged as the most resilient asset class today and we see potential for more consumers to pivot towards home ownership in the longer term. In tandem, ongoing work from home arrangements are pushing developers to become more flexible and give homebuyers the option of creating a study room if need be," Nair was quoted as saying in a July 29 press release.

Pile of unsold homes

For years, Indian builders continued to announce new projects even with sales not keeping pace, leading to a build-up of unsold inventories in most major cities. That situation has eased somewhat, with fewer projects launched in the last two years.

The current level of unsold inventory at various stages of construction in the top cities "does not portray a bleak situation of the residential market," Nair said. The company's analysis shows that the time taken to sell unsold inventory and project completion period are in sync in most markets, he added.

The stock of unsold homes with builders edged higher to 446,787 as of June-end, from 445,836 as of end-2019, Knight Frank data show. The inventory last year was down to its lowest level since 2011, after it peaked at nearly 715,000 in 2014.

"The more significant drivers of housing demand – consumer sentiment and income stability – are not supportive at the current juncture. As and when the economy moves towards normalcy, the low interest rate will prove a catalyst for housing demand revival," Rajani Sinha, chief economist at Knight Frank, said in comments emailed to S&P Global Market Intelligence.

Economic growth key

The Indian economy is set for its worst year in four decades with the central bank predicting a contraction in the gross domestic product in the year to March 2021 amid heightened consumer pessimism.

The Reserve Bank of India held steady at its last monetary policy review on Aug. 6, after having cut its benchmark interest rate by 250 basis points since February 2019 to lend support to the faltering local economy. Real GDP expanded 4.2% in the year that ended March 2020, slowing from a 6.1% expansion in fiscal 2019. Most analysts expect the government to report a contraction in GDP when it releases data for the April-to-June period on Aug. 31.

The April-to-June quarter saw a "massive drop" in both sales and new launches, though that was expected because of the lockdown measures, Anuj Puri, the chairman of Anarock Property Consultants, wrote in an undated blog on the company's website. Four new projects with 1,390 units were launched during the period. Sales fell to 12,740 units, compared with 68,600 in the same period of last year, Puri said.

With the lockdown measures being partially withdrawn, "traction in the residential market is slowly coming back with increased walk-ins and queries," Jones Lang LaSalle's Nair said. At a macro level, home prices have remained stable for the last four to five years, making property valuations relatively more realistic, he added.

New laws may help

Timely completion of projects, quality of construction and transparency were some of the biggest concerns for home buyers in India. Several news laws, including the Real Estate Regulation and Development Act of 2016, another law to prevent property transactions on fictitious names and bringing real estate under the goods and services tax regime have brought greater transparency in what was earlier a largely unregulated sector, analysts say.

The act, also called RERA, "has fundamentally changed the way the business of real estate is conducted in India. The compliance requirements and disclosure norms that developers need to adhere to today have brought down the risks for end-users and investors and paved the way for a stronger and more sustainable market," Knight Frank's Sinha said.

States have to notify their own rules under the federal RERA law and Sinha said it is "still work in progress in most parts of the country." However, the "structural shift" brought about by it is a positive development for the market, she added.