Domestic housing market shifting gears in a recovering market

The housing sector in India has set to firm up its pace post Covid-19, after a lull of a few quarters. Due to weak demand, the housing market was in choppy waters even before the pandemic. With Central level reforms like Real Estate Regulatory Authority (RERA) that came in 2016 and the Goods and Services Tax (GST) in 2017 have provided much-needed transparency in the residential sector. The residential segment is on the path to recovery starting in 2021. Recovery is largely led by government stimulus, market-led price discovery, and increased demand for home ownership.

New residential launches are picking pace since Q4 2021. Consumers have started preferring to work closer to their homes and are eyeing more spacious housing. Since Q1 2021, the demand for 3 and 4 BHK housing units has been rising across the major cities and some tier II cities. The increase in demand can also be accounted for by the rise in the quantum of loans disbursed by housing finance companies. Major housing finance companies reported annual growth of about 8%. The credit rating agency, Crisil further expects the portfolio of NBFCs/HFCs to grow by about 13-15% on account of pent-up demand.

The residential unsold inventory has constantly been dropping since Q2 2020. However, an increase in launches and the third wave of Covid-19 in Q1 2022 led to a slight uptick in the unsold inventory during the quarter. Further, an increase in repo rates by 90 basis points announced during May-June 2022 is likely to impact the demand as major banks have raised their interest rates by 0.3-0.5% for the end users. With a 70-basis point increase in interest rates, the EMI amount for an individual rises by about 7-8%. With surging rates, consumers are likely to feel a slight pocket pinch. However, the interest rates are still below the pre-pandemic levels, which would still make it an opportune time for buyers to purchase housing units.?

The real estate industry was in a downturn for a long time, but now the cycle has turned. The positive sentiment will continue as all segments are performing well. Despite the increase in the repo rate, affordability is at an all-time high. ~quoted by a leading real estate developer

With bullish sentiments and robust demand, major metro cities noted a 4% YoY increase in housing prices. Housing prices have surpassed pre-covid levels. Grade A developers started increasing prices in the latter part of 2021. An uptick predominantly led to this in demand and higher borrowing and input costs. Markets like Delhi-NCR saw a surge in housing prices at around 11% YoY. Prices of housing units in Hyderabad and Ahmedabad increased by 9% and 8% YoY. Developers feel this uptrend is expected to continue as the rate hike is currently not signaling a slowdown due to robust demand across the country.?

Developers in the affordable and mid-housing segment continue to operate on thin margins due to escalation in input costs. The cost of key materials like cement and steel has risen over 20% YoY in March 2022. The construction cost is expected to rise by 8-9% by December 2022. So far, developers have been cautious about increasing prices as the market was recovering from the aftermath of Covid-19. However, if construction costs continue to rise, housing prices too could also see a further rise. The rise in interest rates, as well as housing prices, is likely to translate to apprehensions for homebuyers.?

In the next few quarters, a quicker comeback is expected from the pandemic-led slowdown. Demand momentum is expected to continue regardless of the headwinds created by Covid-19. Projects from tier I developers, larger-sized units, and integrated townships are expected to be in demand. Developers will launch projects that are driven by research and homebuyers’ expectations. Developers will also explore plotted developments and villa projects in the high-end segment, in close proximity to top cities. The focus on mid-segment and affordable housing will continue in 2022.

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