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If a demand slowdown has been keeping price growth in India’s residential real estate market in check, the sudden Coronavirus outbreak, which threatens to drastically impact global economic growth as countries go into nationwide lock-downs to contain the spread, would wipe off any chances of value appreciation in the property market.
PropTiger.com numbers indicate that nine major residential markets in India registered only negligible price growth in the past half a decade amid consumer sentiment hitting a new low.
Property prices in India’s nine prime residential markets
|City||Average property value as of December 2019 psf||Net % change in average price over December 2015||CAGR|
Source: PropTiger DataLabs
However, those expecting any reduction in property prices, in the medium to long term, might be disappointed as property values, if anything, are likely to show an upward movement in the post-Coronavirus world, based on several factors.
Why property prices in India might not drop after COVID-19?
The Economic Survey 2019-20 pointed out that builders should allow prices to drop by taking a haircut as a remedy to reduce their inventory burden. However, a number of issues are at play which makes doing that a near- impossibility.
Developers are under tremendous pressure
In the top nine residential markets, developers are currently sitting on an unsold stock worth Rs 6.1 lakh crore. With buyers becoming fence-sitters, almost-completely making any chances of profit-making for a large number of builders out of question, sources of liquidity are also fast drying up with the ongoing non-banking finance companies (NBFC) crisis.
As it is, several big developers in the country have been dragged to the insolvency court by banks over non-payment of large-scale dues. If the demand slowdown problem persists for a longer period, more builders might have to face the same fate – a highly likely scenario in the backdrop of the contagion.
Recall here that the total outstanding loans of real estate developers from commercial banks, NBFCs and HFCs are estimated to be around Rs 4.5 lakh crore as of March 2020.
While the government has already decided to set up an Rs 25,000-crore stress fund to help builders complete their pending projects and infuse more liquidity into the system through a Covid-19-focused stimulus package, an overall economic downturn would limit its capacity to focus on real estate and offer substantial relief. In a complex scenario like this, earning by way of home sales remains a builder’s only option.
“Residential real estate in India is likely to see a further slowdown in the coming months, given that attendant activities are at a standstill. With construction already coming to a grinding halt, project completions are slated to be postponed. If this situation prolongs, the deployment of funds, including the Rs 25,000-crore alternative investment fund (AIF), will remain on hold,” says Anurag Mathur, CEO, Savills India.
“Housing sales may see a sharp dip for at least the next one quarter as consumers’ biggest priority currently is health/safety and income preservation,” Mathur adds.
While the recent RBI move to lower repo rate to 4.4% and offer a three-month moratorium on loan EMIs would provide developers some cushion against the overall shock, reducing property prices doesn’t seem a possibility, especially as buyers remain elusive from the market. In the meantime, project launch numbers would drop significantly on account of various evident factors.
Cost of supply materials to increase
Projects delays are on cards as supply of building construction materials that India exports from China is hampered in the wake of the pandemic. The impact of the situation would be more prominent on premium-luxury housing projects which rely heavily on supplies of fixtures and furnishings from China, the country where the source of the contagion has been tracked down to. The time gap will not only delay housing projects but also ultimately increase the overall cost of project building since builders here will have to rely on alternative sources to meet their building requirements.
The centre’s ‘Make in India’ program might get a boost from this difficult situation in the medium to long term, but short-term pains for developers are inevitable. Dropping prices in a scenario like this is hardly the answer. However, the government might launch measures that might make it more lucrative for buyers to invest in property. It is also expected to support real estate, the second-largest employment generator in the country, by waiving off tax on unsold inventory.
“Depending upon the duration and depth of the current crisis, prices may or may not see a downward movement as the holding cost of the developers will go up while the pressure to liquidate unsold inventory will increase. It would be too early to predict the extent of price change in the near-to-medium term,” opines Mathur.
Interest rates to fall, home-buying to become affordable
The RBI is has reduced the repo rate to 4.4%, consequently making borrowing cheaper for homebuyers − home loan interest rates are already as low as 8%. Further reduction would act as a booster for buyers to invest in property at a cost advantage once clarity on the impact of COVID-19 on the job market is achieved.
“It is important for (banks) to immediately transmit the (repo) rate cut (by the RBI) to the homebuyer which will boost consumer sentiment,” says Ramesh Nair, CEO & Country Head of JLL India.
While the government has already extended the benefits offered under Section 80EEA till March 2021, it might also consider extending it further in order to give a boost to first-time homebuyers. Experts are of the view that anxiety over impending job loss among consumers is likely to persist even after the worse is over and normalcy returns. The government will have to continue extending support till that period.
Will property prices fall due to Coronavirus impact?
While any sharp increase is unlikely, property prices might continue to maintain the same level, because of a demand slowdown.
What will be the impact of Covid-19 on housing market?
Demand for housing is likely to be hit in the short term due to the outbreak.