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Catch 22 Situation!

Torbit - July 10, 2022 - - 0 |
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With high property prices  and rising interest rates, restricting the home sales momentum , residential real estate seems to be facing bumps. And amidst these not so favourable times, housing developers appear to be in a catch 22 situation. While they have already increased home prices up to 10%,to take off pressure on margins, any further home  price hike may well put brakes on the sales momentum. But if they do not go for  any further price hike despite more interest rate hikes in the coming months, it may adversely impact their balance sheets which are already under pressure. Especially in the case of affordable housing developers.   

The real estate sector was grappling with weak demand even before Covid. But post-covid pandemic when residential real estate was showing smart recovery, it got twin setbacks in the form of 90 basis points rise in repo rate by the RBI and steep rise in input costs leading to increase in home prices. In the price sensitive market largely driven by affordable and mid-priced housing, 7% percent increase in the EMI adversely impacted the home buyers affordability.  This is reflected in the latest Affordability Index of Knight Frank India ,which has dipped by 2 percentage points. The reduced affordability has somewhat affected homebuyers’ sentiment, resulting in moderation in home sales  as Anarock  puts it at 15% in Q2 2022, compared to Q1 2022. On top of that, the high unsold inventory is still a cause of worry for home developers. As per CREDAI-Colliers India-Liases Foras Report , in January- March quarter of 2022, unsold housing stock rose by 1%  to 9.01 lakh units across 8 major cities.  

Going forward, things are not going to be easy either. Rather, the going may become even more difficult  for various reasons. Home affordability will further decrease as RBI is likely to have two more repo rate hikes in the current fiscal, cumulatively  amounting to 50-80 bps to tame elevated inflation. And amidst high inflation, construction material costs may further rise, forcing developers to increase prices. Especially as  due to rising interest rates, both the cost of sourcing funds and holding cost are increasing, putting pressure on their balance sheets . And since the rainy season happens to be a lean season for real estate, home sales will get impacted.Credai President Harsh Vardhan Patodia admits that the sector is under pressure and  short term demand from home buyers may well be impacted, though he is confident of a robust recovery in the long term.  

The conflicting  research data about home sales has further confounded the situation. While Anarock report talks about dip in sales, Magicbricks’ April-June 2022 PropIndex Report says that there is a 16.9 % increase in sales enquiries since last quarter. A Knight Frank report  shows 60% yoy increase in sales in H1 2022 over H1 2021, with NCR sales having more than doubled. A recent survey by CREDAI NCR says that 68% of developers have found no impact of increased lending rates on housing demand and 45% developers have a bullish outlook . 

With the economy picking up at the broad level and salaries stabilising, developers are optimistic about home loan demand and residential sales.Housing experts like Deepak Parekh are confident about the mortgage market doubling in next five years. But now state governments have withdrawn major  incentives like rebates on stamp duty, a key driver for home sales.  In fact the Delhi government has even hiked the collectorate rate. It remains to be seen whether the  upcoming festive season, beginning with Navratri in September, will be able to shake off  these negative factors , boost buyers’ sentiment  in order to keep housing demand intact. 

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