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Will property prices crash in India due to the corona-virus outbreak?

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The developer community in India has been in a tizzy after union minister of commerce and industry Piyush Goyal on June 3, 2020, said builders needed to sell housing projects at reduced prices and let go of the high-priced unsold stock. Will prices fall?

If a demand slowdown has been keeping price growth in India’s residential real estate market in check, the Coronavirus pandemic, which threatens to drastically impact global economic growth would wipe off any chances of value appreciation in the property market. In the near future, expecting price appreciation would be nothing but wishful thinking.

As it is, the nine major residential markets in India registered only negligible price growth in the past half a decade amid consumer sentiment hitting a new low, PropTiger.com numbers indicate.

While there has not been any significant upward or downward movement in terms of pricing, Ahmedabad and Hyderabad’s real estate markets have seen some appreciation over time. In the MMR, where property prices are already much higher than the national average, price growth has been quite slow. Only the housing markets in the National Capital Region have undergone some correction. Elsewhere, the growth has been largely insignificant.

According to a recently-unveiled report by international property consultancy Knight Frank, the top six housing markets in India underwent a price correction in the range of 2%-7% during the July-September period in 2020.

A poll conducted by Reuters also shows average house price is expected to fall 6% this year and 3% in 2021. The poll, in which 15 analysts participated between September 16-28,2020, a region-wise house prices decline of 7.5%, 7.0%, 5.0% and 3.5%was also predicted for Mumbai, Delhi, Chennai, and Bengaluru, respectively.

As for the future, the effects of the pandemic, say some experts, would result in property prices dropping by at least 10%.

“Prices in most markets have held steady, despite the lending and shadow banking crises. They may come down by 10%-20% across geographies, while land prices could see an even higher reduction of 30%,” Pankaj Kapoor, chief executive of real estate consultancy firm Liases Foras was quoted as saying.

According to HDFC chairman Deepak Parekh, developers should be prepared for up to a 20% fall in housing prices.

Some, however, beg to differ from the likes of Kapoor and Parekh. This segment is of the opinion that those expecting any reduction in property prices, in the medium to long term, might be disappointed as property values, if anything, are likely to show an upward movement in the post-Coronavirus world, based on several factors.

Why property prices in India might not drop after COVID-19?

The developer community in India has been in a tizzy after union minister of commerce and industry Piyush Goyal on June 3, 2020, said builders needed to sell housing projects at reduced prices and let go of the high-priced unsold stock.  In a terse message to the community, the minister said the government might offer some concession in circle rates, to lower their burden but they must be more forthcoming in reducing prices.

“If any one of you feel that government will be able to finance in such a way that you can hold longer and wait for the market to improve — because the market is not improving in a hurry — your best bet is to sell,” Goyal said during a video conference meeting organized by industry body National Real Estate Development Council (NAREDCO).

“You can choose to be stuck with your material (inventory), then default with the banks. Or, you can choose to sell it even if you have bought it at high prices and move forward,” he added.

The statement came as a rude shock to the NAREDCO, which has sought USD 200 billion in relief, to deal with the aftermath of the Coronavirus crisis. Before things went bad, because of the pandemic, the sector was already grappling with a USD 120 billion-bad debt situation with banks.

Coming down heavily on the community, currently saddled with bad loans and huge inventory, the minister added, “You have to complete your projects before you sell because buyers will not buy under-construction projects. In my life, I will not buy an under-construction flat from anybody.”

The next day, newly elected CII president Uday Kotak said he was in agreement with Goyal.

The Economic Survey 2019-20 also pointed out that builders should allow prices to drop, by taking a haircut as a remedy to reduce their inventory burden.  Similar views were aired by the HDFC chairman when he said builders should sell their inventory at whatever prices they get to generate liquidity. However, a number of issues are at play, which makes accepting such suggestions difficult.

When asked whether his company plans to reduce prices to boost sales in the prevailing circumstances, Godrej Properties’ managing director Mohit Malhotra replied in the negative. “We do not have any plans for cutting prices. The industry has been reeling under a slowdown for the past eight years. There is limited scope to cut prices,” Malhotra was quoted by the media as saying. Many of his peers in the industry feel the same way. Why so?

Developers are under tremendous pressure

As of September 30, 2020, developers were sitting on an unsold stock consisting of over 7.23 lakh units worth over Rs 6 lakh crore in the top nine residential markets. With buyers becoming fence-sitters, almost-completely making any chances of profit-making for a large number of builders out of question; sources of liquidity are also fast drying up with the ongoing non-banking finance companies (NBFC) crisis.

As it is, several big developers in the country have been dragged to the insolvency court by banks over the non-payment of large-scale dues. If the demand slowdown problem persists for a longer period, more builders might have to face the same fate — a highly likely scenario in the backdrop of the contagion.

Recall here that the total outstanding loans of real estate developers from commercial banks, NBFCs, and HFCs are estimated to be around Rs 4.5 lakh crore as of March 2020.

While the government has already decided to set up a Rs 25,000-crore stress fund to help builders complete their pending projects and infuse more liquidity into the system through a COVID-19-focused stimulus package, an overall economic downturn would limit its capacity to focus on real estate and offer substantial relief. In a complex scenario like this, earning by way of home sales remains a builder’s only option.

“Residential real estate in India is likely to see a further slowdown in the coming months, given that attendant activities, are at a standstill. With construction already coming to a grinding halt, project completions are slated to be postponed. If this situation prolongs, the deployment of funds, including the Rs 25,000-crore alternative investment fund (AIF), will remain on hold,” says Anurag Mathur, CEO, Savills India, had said earlier.

“Housing sales may see a sharp dip for at least the next one quarter as consumers’ biggest priority currently is health/safety and income preservation,” Mathur adds.

Data available with Housing.com show home sales in India’s eight key residential markets fell by 57% during the July-September period in 2020 as compared to the same period in 2019. A total of 35,132 units were sold during the period between July and September 2020, data show.

While the recent RBI move to lower the repo rate to 4% and offer a moratorium on loan EMIs would provide developers some cushion against the overall shock, reducing property prices does not seem to be a possibility, especially as buyers remain elusive from the market. In the meantime, project launches could drop significantly. In the September 2020 quarter, in fact, only 19,865  new units were launched across the eight markets, data show.  This is a decline of 66% year-on-year.

The cost of supply materials has increased

Projects delays are on cards as the supply of building construction materials that India imports from China is hampered in the wake of the pandemic and amid rising tension between the two countries. The impact of the situation would be more prominent on premium-luxury housing projects which rely heavily on supplies of fixtures and furnishings from China, the country where the source of the contagion has been tracked down to. The time gap will not only delay housing projects but also ultimately increase the overall cost of project building since builders here will have to rely on alternative sources to meet their building requirements.

The center’s ‘Make in India’ program might get a boost from this difficult situation in the medium to long term, but short-term pains for developers are inevitable. Dropping prices in a scenario like this is hardly the answer. However, the government might launch measures that might make it more lucrative for buyers to invest in property. It is also expected to support real estate, the second-largest employment generator in the country, by waiving off tax on unsold inventory.

“Depending upon the duration and depth of the current crisis, prices may or may not see a downward movement as the holding cost of the developers will go up while the pressure to liquidate unsold inventory will increase. It would be too early to predict the extent of price change in the near-to-medium term,” opined Mathur.

Interest rates at a record low, home-buying to become affordable

The RBI has reduced the repo rate to 4%, making borrowing cheaper for home buyers. Consequently, home loan interest rates are already as low as 6.95%. This would act as a booster for buyers to invest in property at a cost advantage, once clarity on the impact of COVID-19 on the job market is known.

“It is important for (banks) to immediately transmit the (repo) rate cut (by the RBI) to the home buyer, which will boost consumer sentiment,” says Ramesh Nair, CEO and country head of JLL India.

While the government has already extended the benefits offered under Section 80EEA till March 2021, it might also consider extending it further, in order to give a boost to first-time home buyers. Experts are of the view that anxiety over impending job loss among consumers is likely to persist, even after the worst is over and normalcy returns. The government will have to continue extending support till that period.

However, some correction would still be expected from the developers’ side, as cheap home loans alone would not do the trick in a weak job market. Property investments might, in fact, rise if developers were to offer some reduction.

According to a survey conducted by Housing.com in collaboration with   NAREDCO, 47% of tenants would like to invest in a ‘rightly-priced’ property. Moderation of prices would also attract tenants, who have so far been favoring renting over buying, primarily because of price benefits. Those renters who are not in a position to buy a house currently, because of price issues or the nature of their jobs, have also opined that they would buy a property within two years.

Stamp duty correction

With an aim to further boost buyer sentiment and reduce the overall cost of purchase for buyers, some states have also announced reductions in stamp duty—the tax that buyers have to pay to the state government as a percentage of the transaction value—in the aftermath of the Coronavirus pandemic. For example, Maharashtra has announced a temporary reduction in rates for a period of six months. Buyers in that state, which is home to the most expensive property market in India (Mumbai), can currently register a property by paying 2% of the property value as stamp duty.  Karnataka has also reduced the stamp duty to 3% on properties worth up to Rs 30 lakhs. On September 7, 2020, the Madhya Pradesh government also announced a reduction in the cess on stamp duty charged for registration of properties by 2%.

What should an investor do?

Housing prices in some of the megacities of India have witnessed significant correction. While expecting appreciation in the near future would not be a wise idea, this present scenario does provide investors with an opportunity to put their money in residential real estate at a low price point. Since prices are unlikely to undergo any further correction, this could prove to be an ideal opportunity for buyers, if they are able to arrange the funds. Since home loan interest rates are also at record low levels currently, housing finance is also available to buyers and investors at comparatively affordable prices.

source – https://housing.com/news/will-there-be-a-drop-in-property-prices-in-india-due-to-the-coronavirus-outbreak/

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