Coronavirus Pandemic: How Will It Affect Property Prices In India?
In the past five years, property prices in India’s major cities — barring a few exceptions — witnessed only a negligible growth amid a slowdown in consumer demand, data available with PropTiger indicate. This growth would further be impacted in the aftermath of the Coronavirus outbreak.
City | Average property value as of December 2019 psf | Net % change in average price over December 2015 | CAGR |
Ahmedabad | Rs 2,974 | 3% | 0.6% |
Bengaluru | Rs 5,194 | 11% | 2.1% |
Chennai | Rs 5,221 | 4% | 0.8% |
Gurugram | Rs 5,236 | -7% | -1.4% |
Hyderabad | Rs 5,318 | 40% | 7% |
Kolkata | Rs 4,035 | 4% | 0.7% |
Mumbai | Rs 9,446 | 15% | 2.8% |
Noida | Rs 3,922 | -3% | -0.8% |
Pune | Rs 4,874 | 2% | 0.5% |
Source: PropTiger DataLabs
Nevertheless, assuming that property prices are going to drop significantly or witness a crash would be wrong.
“The impact on pricing cannot be judged at this point in time, since most markets have already corrected between 15 and 20 per cent over the last few years. Further correction, especially in primary projects, is difficult,” says Shalin Raina, managing director-residential services, Cushman and Wakefield.
“It would be too early to predict the extent of price change in the near-to-medium term. 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,” says Anurag Mathur, CEO, Savills India.
While only the duration of the pandemic would be the decisive factor impacting prices, a sharp downwards movement is an unlikely scenario.
How so?
Price analysisWhen demand for a commodity rises, its suppliers continue to increase the cost of the commodity, factoring in the purchasing power of the consumer. However, the converse may not be true, especially for real estate. Even if there is a steep fall in the demand for housing, one can only expect a limited correction in property prices, because of the very nature of the asset.
The Indian housing market is no exception to this basic rule of economics.
Houses cannot be compared with other perishable commodities. Sellers are likely to postpone the transaction till they see a possibility of selling the asset for at least some profit. This is why Indian developers are currently sitting on inventory of nearly 7.5 lakh homes across the nine prime residential markets. Even though they have to pay tax on this inventory under the existing tax laws, developers continue to wait for the right opportunity, rather than take extreme haircuts on the transaction to avoid the tax burden.
India’s inventory burden
| October-December 2018 | October-December 2019 |
Total inventory (in 9 cities*) | 8,83,483 | 7,74,860 |
Overhang** | 31 months | 29 months |
Source: PropTiger DataLabs
Note: *The nine cities included in the analysis are Ahmedabad, Bengaluru, Chennai, Gurugram, Hyderabad, Kolkata, Mumbai, Noida and Pune.
** Overhang is the estimated time that builders would take, to sell off the existing stock, keeping in account the current sales velocity.
While the developer community is invariably criticised for adopting a staunch approach on pricing, a fact that is often overlooked, is that developers are paying a certain amount to banks for a particular unit. It would be irrational to expect them to sell a house for Rs 25 lakh, if the overall cost of the unit is that much.
Reducing prices is also unimaginable at a time when, barring essential operations, all activity has come to a complete halt. There will not be much activity, vis-à-vis project launches, in the near future as developers would have to extend the deadlines on their ongoing projects, because of the complete halt on construction for at least two to three months. Labour shortage would also be major challenge for them to address.
Builders will also find it extremely hard to get funding for their new projects, with amid the crisis in the country’s non-banking finance companies (NBFC) sector, on which they largely depended for their borrowing needs. Defaults by major NBFCs in the past one year, have dried up a major source of funding for developers, whose profit margins are already stretched thin amid a demand slowdown.
"It is very unlikely that there will be any further reductions in realty prices, as the prevailing market has anyway gone through a major correction cycle recently and is virtually at an all-time low given the inflationary matrix," says Amit Modi, president-elect, CREDAI western UP.
"At the same time, we do see buyers getting any benefit from the reduction in interest rates, resulting in low EMIs, courtesy the recent RBI announcements," adds Modi, who is also the director of ABA Corp.
PropTiger.com data show only 64,034 units were sold in the nine cities during the festive season between October-December 2019 as against 91,464 sold during the previous festive season. For the time being, developers seem likely to part with their unsold inventory, only if the sale results in gains, even if it is minor.
Real estate’s asset value to get a boostWhile investors in India have favoured real estate, the Coronavirus crisis may force them to rethink, if rental yields also begin to fall. Nevertheless, there is always hope that real estate will make a comeback as a preferred investment choice, in a post-Coronavirus environment. "Post-COVID-19, the market is expected to see an upward spike in real estate purchases and investments, as investors and home buyers will be looking for safe and stable sources of investment, especially after the near wipeout of capital in stock exchanges. We believe that in the prevailing conditions, real estate assets are indeed the safest investment, to earn decent returns," says Modi.
“Given the volatility surrounding the stock markets in India, real estate may bounce back, but the government will have to play a critical role in reviving the industry, by invoking measures that create confidence in the minds of the consumers,” Raina concludes.