Falling returns on stagnant prices, limited tax benefits see investors exit; end users seek ready-to-occupy units.
Home loans may be slightly more in demand these days than they were a couple of month back but demand for residential property is unlikely to revive in the next 12-18 months. “Though capital values have been under pressure over the past few quarters, a significant chunk of supply in many micro markets remain unaffordable,” analysts at Crisil Research wrote on Tuesday.
Mortgages in the banking sector recovered marginally in August growing 13.2% year-on-year (y-o-y) from an at least four-year low of 10.5% y-o-y in July, data released by the Reserve Bank of India (RBI) showed. While in September 2016 home loans had grown at 18% y-o-y, over the past year the pace had moderated to a monthly average of 15%. That’s despite an effective asset price correction of around 5-10% in H12017.
However, Crisil Research fears demand for housing will remain subdued for some more time with consumers not really looking to buy homes for the next 12-18 months. Already, home sales in the top 10 cities have declined at a compound annual rate of 8% since 2011, reflecting sluggishness in the real estate space.
“The trend appears set to last well into fiscal 2019 or beyond, portending more pain for developers,” analysts noted, pointing out both space launched and booked had fallen in the last few years.
Increasing automation in the IT/ITeS sectors, which threatens to take away jobs, is one reason for the subdued demand in cities such as Bengaluru, Hyderabad, Chennai and Pune. Crisil analysts estimate employee additions were lower at 1.1 million over 2011-12 to 2016-17 compared with 1.2 million during 2006-07 to 2011-12. “We expect net additions to drop further, and more rapidly over 2017-18 to 2020-21,” they wrote.
Moreover, with returns from real estate falling in the wake of stagnant prices, and tax benefits on properties rented out now limited, investors have all but exited the market. Consequently, builders will need to cater to end users who prefer ready-to-move-in properties. While the Real Estate (Regulation) Act (RERA), if well implemented would address this issue in the medium term, Crisil observed several states were not in sync with the central RERA, with many yet to form a permanent RERA authority. “The dilution of ongoing project definition as notified by some states is a matter of concern,” it said.
Total outstanding mortgages in the banking system stood at Rs 8.9 lakh crore as on August 18. Mortgage growth had begun to show signs of pressure in June as homebuyers put purchases on hold in anticipation of prices correcting further amid uncertainty ahead of the implementation of RERA. Apart from the tendency to fence-sit and concerns around job losses in some sectors, a preference for rentals and risks associated with delivery of under-construction projects are also reasons for tepid demand, Crisil added. The large inventory of units, especially in the mid segment, is adding to the overhang.