Despite rising number of unsold homes, real estate prices continue to rise

Feb 9, 2015

- By Vivek Kaul

Vivek Kaul
The Confederation of real estate developers association of India (CREDAI) a real estate lobby, has written to the government to provide relief to the real estate sector in the upcoming budget which is scheduled towards the end of this month.

"We want infrastructure status for real estate apart from that there should be exemption from the tax and less formalities to obtain home loans for the buyers," a CREDAI official told the Times News Network.

These moves, the lobby believes, will provide the sector some "cheer".

Before this, CREDAI had constantly been talking about the need for the Reserve Bank of India(RBI) to cut the repo rate or the rate at which it lends to banks. Raj Modi, president of CREDAI in the National Capital Region had said in January 2015 : "We have been raising the concerns of developers over higher rates from the government. We are happy that RBI has taken a step by cutting the rates. We expect that this will encourage banks to ease their home loan rates...This will help developers to expedite their projects which were otherwise facing fund crunch. Home buyers' dreams of owning a home would also get a boost as we expect an accelerated purchase cycle."

This comment came after the RBI decided to cut the repo rate by 25 basis points to 7.75%:

The position taken by CREDAI till date seems to be that people are not buying homes because interest rates are high. If RBI starts cutting the repo rate it will lead to banks cutting the interest rate they charge on their home loans. People will borrow and buy homes. And everybody will live happily ever after.

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Only if things were as straightforward as that. I have explained in the past that the major reason why Indians are not buying as many homes as they were in the past is because prices are too high in comparison to the income of people. Further, despite slowing sales, most real estate companies and builders have not budged and refused to cut prices.

This becomes clear through the research report titled India Residential Market Preview for the period October to December 2014, released by Liases Foras, a real estate research and rating company. The research report provides data for six cities (Mumbai Metropolitan Region, National Capital Region, Chennai, Bangalore, Hyderabad and Pune).

The report clearly shows that sales continue to remain slow as the total number of unsold homes pile up. "The unsold stock rose 17% from 709 mn SqL in Dec 13 (Oct to Dec 2013) to 832 mn SqL in Dec 14 (Oct to Dec 2014)," the report points out. Yearly sales across the six cities that the report covers declined by 1.1%.

Despite huge number of unsold homes and falling sales, home prices continued to rise, though not at the same pace as they have in the past (as can be seen from the accompanying table).

City Weighted Average Price of a Flat in Oct to Dec 2013 Weighted Average Price of a Flat in Oct to Dec 2014 % increase in price Months of unsold inventory as on Dec 2014 Months of unsold inventory as on Dec 2013
Mumbai Metropolitan Region Rs 1.23 crore Rs1.32 crore 6.62% 40 48
National Capital Region Rs 73.09 lakh Rs 74.79 lakh 2.33% 40 56
Bangalore Rs 85.21 lakh Rs 85.55 lakh 0.40% 17 35
Chennai Rs 61.57 lakh Rs 63.37 lakh 2.92% 22 41
Pune Rs 55.84 lakh Rs 56.94 lakh 1.96% 21 15
Hyderabad Rs 70.51 lakh Rs 74.77 lakh 6.05% 31 24
Source: Liases Foras

A glance through the column in the table which lists the weighted average price of a flat across various cities, makes it clear how homes have become totally unaffordable across the length and breadth of India. And this is where the problem lies.

Other data also clearly shows this unaffordability of homes across India. Take a look at the following table from the National Housing Bank. It shows the breakdown of home loans given by housing finance companies for buying old homes.

Source: National Housing Bank
As is clear from the above table more than half of the total loans given by housing finance companies have been given to homes worth more than Rs 25 lakh. The data for 2014 is not available. Nevertheless, there is not much reason to believe that the situation would have changed much from what it was in 2013.

The following table shows a breakdown of home loans given by housing finance companies towards the buying of homes (both old and new).

Source: National Housing Bank

The above table shows that more than 47% of all home loans given by housing finance companies were for homes above Rs 25 lakh. This number has jumped dramatically since 2012, when it was at 43%. It also needs to be pointed out that at Rs 25 lakh it would be next to impossible to buy anything half decent in the six cities that Liases Foras tracks. It would be interesting to know, what portion of the total home loans is made of home loans over Rs 50 lakh.

Hence, homes are so expensive that it has led to a situation where the share of housing as a proportion of the Indian GDP is very small. As can be seen from the following table, the only countries that are behind us when it comes to housing are Bangladesh, Sri Lanka and Pakistan.

Source: National Housing Bank

Hence, affordability is the major issue when it comes to real estate. As the Report on Trend and Progress of Housing in India 2013 points out: "This phenomenon[i.e. affordability] has the potential to exclude a large segment of the society as they get priced out of the formal housing finance market...It continues to remain the most critical aspect of housing for a vast segment of the population."

Interestingly, the Technical Group of Housing Shortage estimates that the housing shortage in urban India was at 18.78 million in 2012. In rural India the number was at 43.9 million.

What this clearly tells us is that India's real estate companies and builders have been building homes for only a a very small segment of the population. And even this segment is now not in a position to buy the homes that are being build, given the price that they are being sold at.

It is time the real estate sector woke up to this opportunity. The government also needs to address this, by rapidly addressing supply side issues like archaic building bye-laws, delays in project approvals etc. At the same time it also needs to figure out how to drive down high land costs. And on top of everything, it needs to figure out how to tackle the massive amount of black money that the sector attracts.

Do you think real estate prices will fall in 2015? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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8 Responses to "Despite rising number of unsold homes, real estate prices continue to rise"

Girish Gogte

Feb 10, 2015

A small correction is needed in the table on avg home prices table I think. The numbers seem to have got interchanged for year 2013 and year 2014 because as per the table ( as is) the avg home prices have fallen from 2013 which is not consistent with the remark preceding the table that the "avg home prices continue to rise". Unless the financing companies/banks acquire and force sell the flats to fetch return of the money lent by them to the builders the prices are not going to come down and a lot of restructuring of loans to get out of NPA trap will keep happening which will further camouflage the situation. Most financing to builders is done by PSU banks so actually they are holding public money at ransom and keep hoarding the prices.

Like (3)

Pradeep Kumar Nair P

Feb 9, 2015

Not a hope in hell that prices will drop for the most obvious reasons. Apart from that, there is so called interest from slightly better of NRI's in the middle east who take personal loans at low rates of interest and invest in property in India (being personal loan they don't need to show what they are buying) and given their income levels banks there are willing to take chances. Observe how many INdian real estate robbers have opened offices in the middle east in the past 2 or 3 years. Enough pipeline and hope from those parts of the world to keep the barons hopeful while they continue to nudge the political class for boondoggles and bailouts

Like (4)

Ramasubramanian

Feb 9, 2015

There is lot of speculative investment on housing plots especially in metro and urban areas. People buy and keep the housing plots indefinitely because they are doubly sure that it appreciate and sky rocket in price in matter of years. Thus supply bottle neck is artificially created by people who have enough resources to hold on to the land indefinitely.
Stiff tax regime can set right this.
while approving plots for sale, the approving authority should stipulate the condition that construction should commence within 5 years as otherwise tax should be levied on such properties at the rate of %5 pa on the capital value. It will prove disincentive for people to hold on the property indefinitely. In that case, people with real need alone will venture to buy plots. Even those who could not complete construction will be compelled to shell out a fortune every year to hold on the plot.

Like (4)

Satish Shah

Feb 9, 2015

Dear Vivek,
While discussing arbitrarily prices of homes, all the people look at Builders trying to mop up huge profit, it was never said that land cost, for example in Mumbai City prime location will cost a builder not less than Rs.70k per sq. ft. for built up area ( Govt. sanctions/ levying charge to every plans on built up basis and forces builders to sale on carpet basis ), less affluent area will cost not lesser than Rs.25k and top of it politicians cartel for raw materials like sand has increased from Rs.2700/- for 100 cubic feet to Rs.7,000/- in last 5 years, Cement from Rs.240/- to Rs.335/-, Steel Bars Rs. 32k @ tonne to Rs. 43k, Labour Male Begari Rs.250/- to Rs.500/- and so is Mason Rs.350/- to Rs.700. Mumbai being water locked island couldn't produce/ bring more land hence what ever land bank generation is possible through redevelopment, which itself is bearing lot of cost alike rehabilitation, politicians nexus with office bearers of tenants to exploit cream prior to project launch, highest rated corruption in all departments of Municipality, Fire Fighting Dept., Environment Dept. and Govt.'s other statutory authorities, long pending litigation in various courts, black mailer breeds from RTI, Bhai companies, Police Department and most spiraling escalation of Stamp Duty/ Registration Charges and Various Premiums & Other Charges payable to Govt. Agencies. Apart from that every now and then Govt., Courts and Other Agencies changing/ modifying the Building Industries GOVERNING LAWS ( especially in last 5 years ). A SIMPLE TRUTH " WHICH BUSINESS/ INDUSTRY ALLOWS TO REAP 100% PROFIT". If it was true than why all big corporate people have not joined band wagon ? Generating black money is compulsion to pay to Govt.ministers/ officers, Municipal Officers, Local Politicians, Bhai Co.s, I.T. & Sales Tax Officers apart from Land Owners. ONCE ALLOW EVERYTHING SPEND IN BOOKS OF ACCOUNT WITHOUT QUESTIONING and you know no need to generate black money shall arise.
Satish Shah
P.S. Today Maharashtra Govt. went for pie of Shylock share by increasing rates of Govt. sold Free FSI from 20% to 60% of Ready Recknor's rates and that too of 2015 Ready Reckoner. The same story goes for CIDCO ( an agency controling land bank at Navi Mumbai )

Like (6)

Oliver

Feb 9, 2015

Interesting statistics. We cannot look at the numbers in isolation to the RE industry. The years 2012-2014 have seen the highest inflation challenges faced in our country. This has led to serious inflation in raw material costs. The other challenge was developers kept purchasing land at astronomical rates and had to also factor in delays due to corruption and bureaucracy.
The opportunity for this sector is very high given the fact that the focus on the new government is to create new jobs and the fact that quite a few professionals are looking at setting up new businesses. This coupled with a sharp fall in inflation will help developers bring down rates. New technology like Mivan will also help developers complete projects earlier at a lower cost.

Like (3)

Ajay Gupta

Feb 9, 2015

Sir,
I will put all efforts against credai efforts in this matter, rather they should ask their members to be more considerate in their deals and ask themselves are they being fair & honest in their shady deals, now I have learned of new thing,these developers asking for capital replacement fund even in new construction, I am sure only they know, why it is required in new buildings if the work has been done to good standards.

Like (3)

Ajey Phatak

Feb 9, 2015

First things First-
Interest rates & other matter are secondary or tertiary U& will not drive the demand.
The Government should form a Real Estate Regulatory Authority to regulate & control the prices of the residential & commercial properties.
Builders have been profiteering from their sales under pretext of private financing or holding cost.
Basic urban housing property price should be Construction cost + 15% to 20% mark-up only.
Price of property should be based on “usable carpet area" only and not based on "Built up" or "Super Built up” open spaces.
Additional Taxes like VAT & Service tax should be completely abolished on Housing property cost.
Stamp duty & Registration fees should be very negligible.
Govt. prepared area wise price Ready Reckoner should be more realistic based on the infrastructure facilities available to residents of the area. Minimum benchmarking should be done about what constitutes development

All builder companies should be registered under Company Act and must declare their shareholders with capital stake & other financing sources. This should be on public domain.

Minimum Quality Certification system & Building Energy Efficiency certification system for any residential or commercial property must be made mandatory considering the Green Building standards.

Like (3)

K.Ilango

Feb 9, 2015

Yes . It is going to fall . IT sector employees are not getting job guarantee. Construction industry is not in boom , manufacturing industry is waiting for some clue which may not take off when global scenario is dull .And rural /agricultural sector is not bright.

Like (4)
  
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