The housing market in India is expected to close the year 2022 on a high. Sales of housing units hit a record high aided by resilient economic activity and strong consumer sentiment for home ownership further fueled by the pandemic experience, according to Knight Frank Research.
The sales for the top eight Indian real estate markets were over 2.32 lakh units in the first 9 months of CY22. With this, the industry has surpassed the sales witnessed in the pre-pandemic months. In fact, the sales witnessed in the first 9 months have been higher than full-year sales in 2017.
The traction witnessed in the first three quarters of this year suggests 2022 will undoubtedly set multiyear high for the industry. A large percentage of home sales are bank-financed, and consumer sentiment is slightly affected due to rise in interest rates, but the silver lining is that rate increase has been front loaded and most of the rate hike or inflation concerns should start to settle soon.
Global headwinds make real estate the preferred asset class
Real estate remains to be the preferred investment class given the local and international challenges in today’s unsettling environment. The stock market is excessively erratic and overvalued as per some estimates. The interest rates on FDs remain low. Housing market is relatively more stable. Residential real estate investing gives a steady flow of rental income, in addition to long-term appreciation. It also acts as a hedge against potential financial uncertainty because it is a tangible asset.
So, what else drove the high sales and robust consumer sentiment in the year 2022? Let’s take a look.
Non-resident Indians (NRIs) are motivated to invest in their country of origin by the weakening rupee and the promise of the new Indian economy. Further, new launches of quality housing products in major Indian cities have also attracted such buyers. The well-connected global environment and local market infrastructure growth have substantially aided NRI buyer interest. The amount of NRI investment in the real estate market has risen, which has broadened the pool of potential customers for developers in recent times.
Young owners choosing ownership over rental
The fact that even millennials are now considering buying a home is one of the distinguishing characteristics of today’s demand. The millennial generation is also known as the “renting generation” who earlier decided to utilise their money for the functional premise of the asset rather than ownership. Millennials are currently at their most financially active years when it comes to establishing families and buying homes.
As per Knight Frank Research, millennials now make up around 43% of all house buyers, more than any other demographic group. Since millennials have quite different life experiences, financial situation, and use of digital technology than earlier generations, developer are pushed to innovate and cater to their requirements and housing needs.
Real estate supply side sentiment moderates, yet remains in the positive zone
The pandemic stimulated growth in the Indian real estate market. The very notion of a home, as one of life’s most fundamental requirements, was altered. People felt the need for a large home that can fit work and education requirements. Due to this, demand for large homes increased. There has been an increase in housing demand and consumer confidence since the pandemic remains buoyant. The Knight Frank – NAREDCO future sentiment score, which measures stakeholder perceptions about the real estate sector over the next six months, declined from 62 in the second quarter of 2022 to 57 in the third quarter. Despite this, the Sentiment Score has largely remained above 50, indicating the prevalence of a positive sentiment in the market.
Affordability worsens, yet levels supportive of demand
All of the country’s housing markets have experienced declining affordability as a result of rising home loan interest rates brought on by the RBI’s increase in the repo rate.
Knight Frank’s Affordability Index also states that the four consecutive repo rate increases (a total of 190 bps) have increased EMI load by 7.4% and reduced house purchase affordability by an average of 2% across markets. Despite the rising rates and falling affordability index, investors and end consumers have chosen real estate. This is clearly evident with the kind of traction witnessed in term of sales. The key reason for this is that the affordability level, when considered from a financing benchmark of 50% or less, remains amenable for housing for most cities with an exception of Mumbai. Even in case of Mumbai the level is much better when compared to many pre pandemic years giving comfort to homebuyers.
With demand drivers in place and pressure on inflation and interest rate seen easing, residential real estate is expected to demonstrate strength in the coming year.
(By Vivek Rathi, Director Research, Knight Frank India)