The Top 10 Things That Have Burned Down the Great Indian Home Market

By Bricksnwall | 2024-02-11

The Top 10 Things That Have Burned Down the Great Indian Home Market

Approximately 250,000 new residences were bought annually on average in the top 10 cities between 2015 and 2021. In 2022, this increased by 54% over 2021. Since we had been waiting for this to happen, industry insiders are not overly shocked or overjoyed by the pattern over the last two years.

Written by Sunil Mishra

The previous two years have seen a sharp rise in the number of people purchasing new homes in India's top 10 cities, following seven years of stagnant home sales. This piece examines the causes of the recent market boom, whether the growth rate can be sustained in the years to come, and—above all—should you, Mr. Buyer, purchase a home at these prices?

Approximately 250,000 new residences were bought annually on average, in the top 10 cities between 2015 and 2021. From 2021 to 2022, this increased by 54% to 365,000 newly purchased dwellings; in 2023, this increased to 476,000, a further 31% increase over 2022. That means that, on average, twice as many people are purchasing homes now as there were seven years ago!

Since we had been waiting for this to happen, industry insiders are not overly shocked or overjoyed by the pattern over the last two years. The government implemented a number of steps in 2017–2018 to address the failing new home market, which planted the seeds for current boom. Four different government-led interventions were made.

1. The first was the demonetization of large currency notes in November 2016, which significantly cleaned up the real estate market by lowering the number of cash transactions in real estate transactions. 

2. The most significant intervention was the establishment of RERA, the Real Estate Regulatory Authority, in May 2017. RERA put numerous policies into place to safeguard the interests of typical homebuyers. This featured stiff fines for builders who failed to provide project features on schedule or as promised.

3. Then, in 2017, the Goods and Services Tax Act was passed, greatly benefiting the real estate industry by streamlining the indirect taxation framework for the whole economy.

4. For the benefit of the whole economy, real estate developers' bankruptcy cases were resolved more easily thanks to the Insolvency & Bankruptcy Act of August 2016.

Apart from the four government-led actions mentioned above, there were other variables that contributed to creating the current takeoff environment.

5. From 2017 to 2019, the courts began handing down harsh rulings against dishonest developers who had betrayed the confidence of Indian homebuyers by failing to deliver on their promises.

6. The demise or reduction of significant lending organizations with an emphasis on real estate, such as IL&FS, IndiaBulls, and DHFL, was the last industrial factor during this period. Smaller builders had less access to simple construction financing as a result, while stronger corporate builders gained market dominance.

It was anticipated that the combined effect of these six external forces from 2017 to 2019 will clean up the real estate industry, eventually turning it into a legitimate business, regaining the trust of consumers, and attracting the real purchasers back into the market. However, it seems that these were insufficient on their own.

7. In the microeconomic level, the residential real estate market saw a similar play during the 2015–2021 period, with home values nearly stagnant and incomes and inflation growing at a 6-8% annual rate. Home loans were more accessible due to a benign interest rate regime, and in 2021 the EMI to income ratio reached a record-breaking low. This simplified the home-buying process.

But once more, these prices had been competitive for a few years, and the market conditions had been met since 2018 or 2019. What then led to the most recent spike? The pandemic and its three resulting factors—all of which had to do with consumer behavior—were what ultimately caused the ship to change course.

8. Millennials, or those who would be between the ages of 25 and 40 in 2021 (who make up 440 million of India's population by the way), had been renting homes during the 2015–2021 period because the rental yield—which is calculated by dividing annual rent by the cost of the apartment—was as low as 3% pa and housing prices were not rising. Combined, these made renting a better option than buying a house. Millennials might spend a year by the seaside and the following year by the mountains. Nonetheless, other Millennials thought that they would require a place of their own in case of further unanticipated events during the Pandemic. And a tiny portion of this enormous group began purchasing real estate.

9. The working pair, who had begun working from home or at least in hybrid mode, needed a Zoom room, which was the second factor. Due to this, existing 2BHK owners had a tremendous need for 2.5BHK and 3BHK, and existing 1BHK owners had a demand for 2BHK.

10. Lastly, in 2022 and 2023, the HNI segment—which is the most adept at spotting emerging trends—began to perceive a rebound in the real estate market and began purchasing enormous properties. People's desire to live out their life to the fullest was further reinforced by the Pandemic's "you only live once" aspect.

The demand finally picked up in 2022 and 2023, resulting in an average 15% increase in new home prices across the top 10 cities, with increases ranging from 10% to 24%. This also brings in the investor segment, which had vanished from the market between 2015 and 2021 despite the equity market's respectable 12–14% returns at that time. The sales of new homes in 2024 and 2025 will benefit greatly from these investors' contributions.

Will this upward trajectory persist? 

One should compare the 50 lac migrants who enter India's top 10 cities annually with the 4.76 lac new properties sold in those cities. The 10-15 lac new homes that are sold in China annually are another comparable (at its peak, the number of residences sold in China in a single year exceeded 1 Cr). There is a sizable pool of prospective buyers among the 440 million millennials, and I belong to the group that believes that a portion of this group will continue to become purchasers annually for the next five to six years. This might maintain the demand for new homes at a high level and possibly surpass the million new homes bought annually. 

How do I go if I wish to purchase? 

Therefore, even if prices rose by 15% in the previous year, they should continue to rise by 5–10% annually for the upcoming few years. Therefore, buying a home now is not better than waiting for any kind of correction. It's the greatest time to buy if you need it for personal usage. If you're looking to invest, keep searching for strategic geographic areas that might support a greater price increase than the ordinary marketplaces.

Source: Financial Express