– By Sunil Mishra
After seven consecutive years of slow home sales, the last two years have seen a rapidly increasing number of people buying new homes in the top 10 cities of India. This article tries to analyse the reasons for this sudden surge in the markets, whether this growth rate is sustainable in the coming years, and most importantly, Mr Buyer, should you buy your home at these prices?
From 2015-2021, the average number of new homes purchased in the top 10 cities was about 250,000 per year. This shot up by 54% from 2021 to 2022 to 365,000 new homes bought; and then further to 476,000 in 2023, another increase of 31% over 2022. So, in effect, double the number of people are buying homes now as compared to the average of the past 7 years!
Industry insiders are not too surprised or euphoric over the trend of the past two years, simply because we had been waiting for this to happen. The seeds for this surge were sowed in 2017-2018, when the Government took a series of measures to remedy the ailing new homes market. There were four distinct Government-led interventions.
1. The first one in Nov 2016 was Demonetisation of large currency notes, which reduced the cash transactions in real estate purchases, and cleaned up the real estate sector to a large extent.
2. The biggest intervention was the formation in May 2017 of RERA, the Real Estate Regulatory Authority, which implemented many measures to protect the interests of the ordinary home-buyer. This included strict penalties on Builders not delivering project features as promised and no delivering on time.
3. Then came the Goods and Services Tax act in 2017, which simplified the indirect taxation structure for the entire economy, and the real estate sector was a big beneficiary of this.
4. The Insolvency & Bankruptcy act of Aug 2016, again for the entire economy, made it easier to resolve bankruptcy cases of real estate developers.
In addition to the above four Govt-led interventions, there were more factors, contributing to the building of the environment for the take-off being seen today.
5. Around 2017-2019, the judiciary started pronouncing tough judgments on errant developers, who had damaged the trust of the Indian home-buyer by not delivering what they had promised.
6. The final industry factor during this time was the collapse or shrinking of large realty-focused lending institutions like IL&FS, IndiaBulls and DHFL. This reduced easy construction finance to smaller builders and led to stronger corporate builders increasing their share of the market.
The combined impact of these external six factors of 2017-2019 was supposed to clean up the real estate sector, finally converting it into a serious industry, restoring the confidence of the home-buyers and bringing back the genuine home-buyers into the market. But apparently, these did not prove enough on their own.
7. A parallel play had been going on in the microeconomic level for the residential real estate sector, where prices of homes were almost flat in the 2015-2021 period, while inflation and incomes had been increasing at 6-8% p.a. A benign interest rate regime made home loans easier to take and the ratio of EMI to incomes was at an all-time decadal low in 2021. This made buying homes easier.
However, again, this pricing had already been attractive for a couple of years, and the industry factors were in place since 2018-2019. So what caused the recent surge? What started finally changing the direction of the ship was the Pandemic and the three factors emerging from this, all of them on the consumer behaviour aspect.
8. Millennials (people in the 25-40 years of age in 2021, and which incidentally are 440mn of the Indian population) had been renting homes in the 2015-2021 period because rental yield (annual rent divided by price of the apartment) was as low as 3% pa, and home prices were not increasing. These together made it smarter to rent vs buy a home. Millennials could stay next to the beach for one year, and close to the mountains in the next year. However, during the Pandemic, some of the Millennials felt the need to have their own home for unforeseen circumstances in the future. And a small percentage of this vast segment started buying homes.
9. The second factor was the need for a Zoom room for the working couple, who had started working from home or at least in the hybrid mode. This caused a huge demand of 2.5BHK and 3BHK for the existing 2BHK owners, and a 2BHK demand for the existing 1BHK owners
10. Finally, the HNI segment, which is the smartest to detect early trends, started sensing a revival in the real estate market and started buying huge homes in 2022 and 2023. The YOLO factor (you live only once) in the Pandemic further accentuated the demand in this segment, with people wanting to live up their lives.
As a result of the demand picking up in 2022 and 2023, new home prices finally increased by about 15% on average in the top 10 cities, spanning a 10%-24% range. This brings in the Investor segment also now, who had disappeared from this market because of no price increase from 2015-2021 and with a decent 12-14% returns in the equities market during the same period. These investors will give a further impetus to the new home sales in 2024 and 2025.
Whether this increasing trend will continue? The 4.76 lac new homes sold in the top 10 cities of India should be contrasted with the 50 lac migrants who enter the top 10 cities each year. Another comparable is the 15-20 lacs new homes being sold in China each year (at the peak, it had touched 1 Cr homes sold in China in a year). The 440mn millennials is a huge segment of potential buyers and I am in the camp which feels that some percentage of this will keep on converting to a buyer each year for the next 5-6 years. This may keep the new homes demand high, and this may even touch the 1mn new homes mark purchased in a year. In a rising demand scenario, prices should keep on increasing secularly by 5-10% each year, thereby making it into a serious asset class for investment purpose also. Hence, I am not a big fan of this business cyclicality phenomenon, because the factors for the current change are more structural in nature. Once the market finds its own level of stability after 4-5 years, then the normal cycles will set in.
What should I do if I want to buy? So, while prices have increased by 15% in the last year, they should keep on increasing by 5-10% each year for the next few years too. Hence, there is no point waiting for any sort of correction to buy homes. If you need it for your own use, then this is the best time to buy. If it’s for investment, keep on hunting for smart geographical pockets which may show a case for a higher price rise than the average markets.
(Sunil Mishra is the MD & CEO – Growth Businesses & Chief Strategy Officer at ANAROCK.)
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