How to avoid foreclosures in a Coronavirus-hit housing market?

Never did Indians hesitate much as they planned and implemented the costliest purchase of their lives before. The same is not true anymore. Amid rising numbers of Coronavirus infections, buyers who have committed to the property market are recalculating their financial commitments; prospective buyers, on the other hand, are maintaining social distance from the housing market, quite literally. Beyond the debate over the standing inventory, muted sales, liquidity crunch and broken supply chain of the business, the sector now has a bigger potential threat at its doorstep – foreclosure.

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The Indian Chamber of Commerce (ICC) has estimated that real estate would be witness to 65% defaults from buyers of under-construction projects, due to the Coronavirus-induced lockdown. A CII snap poll of CEOs, finds that 52% of the companies surveyed foresee job losses in their respective sectors. The proportion of jobs that is expected to be cut is quite staggered, with a scary outlook all around. While 47% companies expect less than 15% job loss, 32% companies expect to shed 15-30% of their workforce, once the lockdown ends.

This reminds us of the recession of 2008 when, in the US, 3.1 million foreclosures were filed in that year alone. The US government had then allocated USD 900 billion to loans and rescues related to housing.

Impact of COVID-19 lockdown on the economy and real estate

In India, sectors like aviation, travel, hospitality, real estate, retail, manufacturing and automotive are worse affected and the employees over there would face job losses. Even with a conservative estimate of a lockdown just one quarter, leading to 15-20% job losses and salary cut of 30-40% of the work force, the impact would be severe, with half the working population that buys homes across the top 10 cities of India.

The salary cut across the industries is in the range of 20-30%, as of now. Now India’s gross saving is 30%, as compared to China’s 46%, with a similar high housing inventory. However, India’s household saving is just 18%. This saving rate of 18%, at a 15-year low, could lead to many loan defaults, including on home loans which is the single-biggest EMI burden on most urban Indians.

“The real estate sector, which is already in a slump since 2019, is currently experiencing almost 65% payment default from customers paying the instalments linked to construction. This is because many customers were requesting developers to allow them to delay their payments, as they were facing liquidity crunch due to lockdown,” says ICC director, Rajneesh Shah.

Developers are, nevertheless, advocating a positive outlook. Amit Modi, director of ABA Corp, thinks one has to wait, to see which ticket size the impact would be felt in. According to him, it is unlikely that there would be defaults and foreclosures across the sector.

“I don’t see major job losses in the market. There might be some salary cuts among the opportunistic players. Moreover, you have to understand that a lockdown is not new to the developers. For reasons ranging from the NGT to various court rulings, builders have faced lockdowns. However, a comprehensive global lockdown will have its after effects to some extent but not to the extent of hurting the job market for the next few years. I feel, even if the lockdown is partially relaxed by mid-May and production of goods is restarted, we don’t need to overreact,” says Modi.

Developers’ optimism apart, the moot point today is: What is the way out? Foreclosures could drive the housing market into a deep stress, for the next few years. In a country with over 7 lakh unsold units, the added stress of mortgage defaults could be an inflicted injury, if not prevented.

Will the Coronavirus impact top builders' profit margins?

Coronavirus economic stimulus package for real estate

Experts believe the government must announce a package for buyers, where one could defer EMI payment for a year in case of job loss. In the event of salary cut, the buyer could avail of restructuring of loans with lesser EMI burden and longer tenure to repay. A comprehensive bailout package for those facing job losses or salary cut is beyond the means of the government and the Indian economy.

Naushad Panjwani, regional president of Indo-American Chamber of Commerce, has a word of caution when he says that loan defaults could hit both, the developers, as well as the buyers.

“The developers likely to receive construction-linked payments would be worst hit. It would be a vicious cycle and the government must step in to defer the EMIs in the wake of job losses and restructure the EMIs in the wake of salary cut,” says Panjwani.

Policy relief to prevent possible foreclosure

Defer loan payment for a year, in case of job losses.

Restructure the loan, in the event of salary cuts.

Longer tenure of loan repayment with lesser EMI burden.

Home buyers willing to forego realty amid COVID-19: Track2Realty survey

An online poll by Track2Realty has found that besides unsold inventory, liquidity crisis and buyers’ reluctance, the challenge for Indian real estate is also to keep existing buyers afloat, as job losses and salary cuts threaten to make foreclosures a reality. More than two-thirds of Indians (as many as 70%) are apprehensive about job loss or salary cuts, which they feel is the ‘new normal’ scenario. More than half (52%) of the home buyers working in the top 10 cities maintain that it would be difficult to manage their livelihoods along with the house EMI, for more than a year after having lost a job. 42% of the home buyers categorically say that they would offload the house burden, if they are asked to leave by their employers.

The survey was conducted between April 5 and April 25, 2020, to assess the impact of the increasing job losses and salary cuts across the Indian corporations. A structured set of open-ended and close ended queries was given to the respondents. The survey was grouped into five key areas: The Coronavirus adding to economic challenges and inflation; job losses and salary cuts; future buying sentiments; housing demand in future; and the expectations from the government. The survey noted that the mood of urban Indians in the housing market is quite pessimistic and the sentiment index is at an all-time low.

Coronavirus impact on real estate: Survey highlights

70% Indians feel job loss and salary cuts are realistic.
52% Indians cannot sustain their housing EMI for more than a year, if they lose their job.
42% Indians among those who are likely to lose their jobs, are already working on an exit option.
44% home buyers do not think that a house is the best hedge, in times of crisis.
68% of those who have made new bookings, are likely to exit the housing investment.
In case of a 40% salary cut, more than half the home buyers would exit their housing investment.
92% Indians do not think this is the right time to buy a property.
80% prospective home buyers will not be tempted, even if there is a price cut.
84% Indians believe the government’s focus is on the builders and not buyers.
78% Indians want EMI deferment, in case of job losses.
72% Indians want loan restructuring, in the wake of salary cuts.

Coronavirus pandemic: Is this a good time to invest in real estate?

“My management has sent a notice to us, to be ready for hard decisions where some of us could lose our jobs. We have already taken a salary cut of 20%, for which we had no choice but to give our consent. I have a double burden of both, the rent and the EMI and it is hard to manage the home loan now. I may have to explore means to exit the home loan, where I do not lose my major investment,” says an employee in a media company, requesting anonymity.

More than four out of 10 respondents (44%) also do not think that property is the best hedge against a financial crisis. On the contrary, there is a general despondency that the property could be a potential shackle, in times of financial crisis. “I received the pink slip in the first week of April 2020. Beyond two to three months, I will not be able to pay the EMI, if I do not get another job. Even if I opt for a distress sale, I may not be able to repay the bank. In times of financial crisis, I feel a house could be a liability rather than an asset,” says Akhil Parekh, an automotive engineer in Mumbai.

There is bad news for developers too, who have been struggling to clear their inventory over the last few quarters. No less than 68% of the buyers who have made recent bookings, could exit the investment, due to the economic uncertainty and potential inability to continue to pay the EMI. More than half the home buyers (54%) plan to exit the housing loan commitment, if their salary is cut 40% or more. Amidst the widespread belief that the COVID-19 pandemic would lead to a crash in the property market, the question being asked, is whether this is the right time to buy. Nearly all Indians, a whopping 92%, believe this is not the right time to buy property, with 80% maintaining that even a price cut will not tempt them to buy a house now. “Until the real impact of the Coronavirus on the job market can be evaluated, it would be foolish to invest in property, tempted by some price cut. It is a long commitment and we must be prudent. That is what I advise to all my clients,” says Rohit Nagpal, a financial planner.

The survey found that 84% of Indians blame the government for its focus on only the builders and not the buyers. 78% of the respondents demanded that the government defer their housing loan payment for a year, in the wake of job losses. 72% of those having faced or expecting salary cuts, request the government to direct banks to restructure their home loans, to ease their EMI burden.

In a nutshell, the workforce across the top cities of India is weathering the storm with job losses and salary cuts. Their inability to serve the housing loan, could wreak havoc on the overall economy in general and the housing market in particular. It is time the government comes out with a rescue plan, if not a bailout package.

FAQs

What will be the extent of job losses due to Coronavirus?

According to a CII poll, 52% of the companies surveyed expected job losses in their sectors.

Is this the right time to invest in property during COVID-19?

According to a survey by Track2Realty between April 5 and April 25, 2020, 92% feel that this is not the right time to buy a property.

(The writer is CEO, Track2Realty)

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Ravi Sinha

Ravi Sinha is a journalist with nearly two decades of cross-discipline media exposure. He is the CEO of real estate think-tank group Track2Realty. He has been writing extensively on the real estate sector for nearly a decade. Evaluation of real estate brand performance is his expertise and he has immense insight into consumers’ psychograph in the property market.

Twitter: https://twitter.com/ravitrack2media