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Has the Indian Home Buyer Become Smarter?

May 17, 2018


We have been in Delhi for the past two weeks, which is some sort of a record, given that the maximum that we can survive in the city which thinks that it makes all the decisions in this nation, is ten days.

And this has been a more social visit than our previous visits to Delhi. After the many conversations that we have had over coffee, green tea, glasses of water, squalls and polluted air, in the last two weeks, we can finally feel some change in the air.

Delhites, who, in the past, would rather passionately defend investing in real estate, have now mellowed down. Guess, they have seen, that those who did not invest in real estate over the last few years, are in a rather better position right now, in comparison to those who did. Moral of the story being, the passage of time teaches the most basic things. It's just that it takes time sometimes to realise the most basic things.

Having said that, this is what we could call an anecdotal phenomenon (for the lack of a better phrase), given that it is based on our conversations and we really do not have any data to back it up with.

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The idea of owning a home (or investing in one for that matter) has taken a clear beating in the last few years. In fact, according to property consultant Anarock, home sales in seven major cities in India, were down by 40% in 2017, in comparison to average sales in 2013 and 2014. 2,02,800 homes were sold in 2017. In comparison, an average of 3.3 lakh units per year were sold during 2013 and 2014.

The funny thing is that while the home sales have fallen over the years, home loan growth continues to remain strong. Given that we are talking home sales in cities, it is best to take a look at non-priority sector home loans offered by banks.

The Reserve Bank of India defines a priority sector home loan as: "Loans to individuals up to Rs 28 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs 20 lakh in other centres for purchase/construction of a dwelling unit per family, are eligible to be considered as priority sector provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed Rs 35 lakh and Rs 25 lakh, respectively."

Hence, any home loan of greater than Rs 28 lakh, for a home with a market value higher than Rs 35 lakh, in a city with a population ten lakh and above, is categorised as a non-priority home loan. In a city with a population of less than ten lakh, any home loan greater than Rs 20 lakh, for a home with a market value higher than Rs 25 lakh, is categorised as a non-priority sector home loan.

Let's look at the total amount of non-priority home loans given out by banks in a given year, over the years. Take a look at Figure 1.

Figure 1:

What does Figure 1 tell us? It tell us that the non-priority sector home loans given out during a year, have constantly been growing over the years. This is hardly surprising given that the real estate was doing well. Hence, as people living in cities bought more homes, the total amount of non-priority home loans went up.

(Other than banks, home finance companies also give out home loans. The latest data isn't available in their case. But given that banks give a greater amount of home loans than housing finance companies, there is no reason to believe that the trend with the housing finance companies would be any different.)

Now, getting back to what we were discussing. Non-priority home loans given by banks going up over the years is hardly surprising, as the real estate sector was doing well. So, people in cities took loans and bought homes.

But that as we saw earlier isn't happening now. The number of homes being bought in cities has dropped dramatically, over the last few years. But non-priority home loans are still growing. Take a look at Figure 2, which basically plots the year on year growth of these loans.

Figure 2:

As we can see from Figure 2, the growth in non-priority home loans given out by banks over the years, has come down. Nevertheless, it still remains strong on the whole. In 2017-2018, the growth was close to 22%.

This, during a period, when home sales have slowed down in comparison to the past, new home launches have more or less dried down and home prices haven't really gone anywhere. So, what is really happening? Why are non-priority home loans still going up, despite all the adverse factors working against it.

A good explanation for this lies in the fact that people are buying ready to move in property, directly from other people who had invested in a home in the past. The homes are in societies where people are already living in.

People do not want to buy under-construction homes. They are also uncomfortable buying homes which are built, but are in buildings, where people are yet to move in. If there are a suffice ent number of people living in a society or a building, it is taken as a sign that the chances of legal trouble are lower. The assumption is that somebody must have done the due =-diligence.

Such behaviour comes from the fact that people do not trust most builders anymore, given all that has happened over the last few years (This is not to say that earlier the trust was fabulous). Hence, the preference to buy ready to move in property, which is perhaps all in the clear.

The trust is broken. How do we repair it?

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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3 Responses to "Has the Indian Home Buyer Become Smarter?"

Boss Incognito

May 30, 2018

Whats is researched above is logically true and needs no factual verification ! Common sense acquired from social websites vouchsafe our logical inference. The loot shared by banks and builders have been lately understood by the buyers. Particularly after 2007, aggravated, not triggered, by the global recession. People have been suspecting of some foul thing cooking up from 2007. Shift of black money also happens from real estate to gold.



May 28, 2018

I am agree with Amit, quick profit is the major reason in real estate for investment. Every one loves profit but they can't wait this much. At the other hand demonetization is also a big reason to decreases the sale, which affected real estate business last year.

with regards
Mahima Group



May 17, 2018

It is not only due to lack of trust in builders with respect to under construction property..flats in secondary market are also selling cheaper in the same locality as compared to primary market. This is due to the fact that those who had purchased flats in the hope of making a quick profit have realized that they will have to wait at least 10 years to see an appreciation while builders are not lowering their prices since they still have the holding capability and are using all kinds of media to depict a trend of increase in property prices. Till such time builders lower their prices to a more realistic level(at least 20% down from current prices) ,this trend will continue. Builders who have the courage to shift to the model of selling ready to move flats will do well in future.

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