3 Reasons Why Home Buyers Are Sitting On The Fence

Home is a necessity for all, in which an individual or a family invests at least once in a lifetime, for living or as an asset. Thus, this ensures that there will be no shortage of demand for homes in India, even though there has been a rise in unsold inventory in the country. The number of projects in India with unsold inventory has been growing from past three years. According to PropTiger Data Labs real estate performance report, in spite of the ongoing demand, the sales of homes across top nine cities in the country dropped by 62.5 per cent in the last two years and by 45 per cent in last one year.

So, why are home buyers sitting on the fence?

Is it only price cut?

Long since, real estate developers in India have been blamed for pricing the homes exorbitantly. Plenty of home buyers wait on the fence for the developers to cut down prices so that the properties become affordable for them to buy.
Though there have been cuts in property prices at irregular intervals in the form of schemes and offers, the reduction, highest being six per cent, has not been substantial to make a purchase yet.

While home buyers await further cuts, the developers are not willing. This is in spite of the Reserve Bank of India (RBI) Governor Raghuram Rajan asking developers to do so.

“While we respect the governor's concern to kick-start the real estate sector, it would be prudent to say that from the developers' end, a substantial reduction in prices has already happened. Any further decrease in sale prices would be a deterrent for the growth of the sector, which contributes so much to the economy and employment at large,” said a statement by Confederation of Real Estate Developers' Association of India (CREDAI).

A real estate investment does not simply serve the purpose of dwelling in a home but can also be a valuable capital asset. Ironically, while many home buyers await price cut, they would be more apprehensive to invest in a market where there is a drop in prices. A majority of them take home loans and hope that their asset appreciates faster than the interest that they pay for the loan.

Thus, one of the reasons for disinterest in price cut is the significant number of investors in the market. An investor takes bets in a market where prices are appreciating.

Interest rates too are too high

Along with price cut, home buyers also await for interest rate cut too. Currently, the average interest rate for home loans is around 12 per cent.

In the last eight months, the RBI governor made three cuts in repo rates accounting to 75 basis point (bps) or 0.75 per cent. After this, only a few banks cut their lending rates, the highest being 30 bps. Hence, not much benefit of the repo rate cut reached the home buyers. In fact, home buyers will have to deal with expensive assets and expensive loans too.

Job market & economic growth

The biggest demand for homes comes from working professionals who hold jobs with strong career path, and substantial monthly savings. These professionals now prefer buying a home in comparison to taking property on rent. But, from past three years, the number of people who profess confidence in their job growth for the next 20 years has been thinning, thus affecting the buying sentiment. The information technology (IT) sector in the country, which depends on the US and European spends, is seeing sluggish absorption of new graduates along with fewer hikes in the last few years. The infrastructure sector, which was booming a few years back, too is facing the downturn with companies stressed due to debts and stagnant under-construction projects.

Also, the telecom sector, which has witnessed growth with increased data consumption, is also on the receiving edge of stressed margins and high capital expenditures. Consequently, the financial services business, which depends on savings and investments of investors, too has been sluggish. These sectors are also suffering due to high inflation, which has brought down the monthly savings. The only sector, which is growing and hiring, e-commerce.

The gross domestic product (GDP), which presently stand at 7.3 per cent, has been on a rise from past two years. By end of this fiscal, the number is expected to grow over 7.5 per cent. The fears of home buyers is further raised by the cracking Chinese markets and European crisis over Greece, falling commodity prices, and their subsequent ripple effect across the world. The market analysts and experts are predicting crisis for the emerging markets including India as well, making the economy vulnerable and bringing many more sectors into the ambit of slowdown.

So, it's not just the lowered prices that the home buyers are waiting for, but other parameters, that play a crucial role when making a purchase decision, to fall in place. All in all, it can be said that the home buyers are waiting for Acche Din.

(Katya Naidu has been working as a business journalist for the last nine years, and has covered beats across banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities)