Prices in the real estate market may be defying gravity. And the same goes for the rising interest rates. But a recent survey conducted by Federation of Indian Chambers of Commerce and Industry (Ficci) says that a major chunk of real estate firms believe that the rising price in Indian real estate sector is here to stay. Ask any real estate consultant, and they have all the positive signals for the buyers.
The buyers for one are feeling the pinch after the interest rate hike. Considering the fluidity in the market, most of the home loan borrowers have taken loans on a floating rate basis. Ask Vinay, a home owner in Indraprasth Ghaziabad and he confirms that while applying for home loan, the sales person counselled him to choose for a floating interest rate. In fact, home loan financers like Housing Development Finance Corporation (HDFC) and State Bank of India (SBI) confirmed that nearly 90% of their existing home loan customers are paying floating rate interest.
Currently, the speculations on the sustenance of this boom should not prompt one to draw a parallel between now and the late nineties when property prices had crashed. Rather, as the FICCI survey suggests that the northward movement of prices in real estate is likely to continue in the coming months. However, one can expect a 10-15 % correction in the market prices.
Sales of homes seem to have slowed down for now. This is just the immediate dampening effect of interest rate hike. Though residential property requirement will bounce along quite nicely. In the coming four to six months the climbing trend in prices shall continue.
As market observers predict, the country’s economic growth will continue to create demands on the need for space – be it residential or office. Property consultants suggest that a delay in home buying plan can only become a disappointment. If a buyer delays his plans because of the interest rate hike, he may in the end up paying even more later. Analysts suggest that as soon as inflation rate falls below 5%, the market can expect RBI to revisit its strategy and allow interest rate to fall.
In fact, a FICCI survey suggests that with prices on the rise, a delay in purchase would result in added expenditure. According to Vivek Bharati, Advisor, National Policy, Programme and Projects, FICCI, “the current economic environment is creating demand for all kinds of real estate across all town categories.”
Considering the economic environment, the over all trend hints at a sustained growth in this sector, adds Bharati. There is a huge demographic shift along with a change in occupational activities. Migration is a concomitant of this shift. As people move more towards the cities, the demand for residential properties rises.
With the rising income levels, coupled with a scarcity in availability of property in desired locations, buyers are going to exercise all options of owning a house. The effect of the rise in interest rates on the sale of residential property generated a mixed response in the survey. Fifty per cent of the respondents felt that the rise in the interest is likely to lead to a decrease in the sale of residential property. The reasons for the decrease sales were attributed to the increase in EMI, whereas the rentals have remained constant causing users to more readily opt for rental housing.
An equal number of respondents in the FICCI survey argue against the view. They feel there would be no effect on the sales as a house is a need-based and not market-driven. An added advantage to buy a property is the income-tax benefit available for self-owned residential property.
The housing sector continues to under supply as compare to the demand. The supply constraints will rise with the emerging middle class and their rising income. This will give the much-needed momentum to this sector. India’s upwardly mobile upper middle class is growing at 20% a year, and the number of middle class households is expected to reach 350 million people, by 2010 (McKinsey report). Rising per capita income, increased literacy and rapid urbanization have caused rapid growth in demand patterns. The rising aspiration levels, increase in spending power has led to a change in the consumption pattern. Apart from the demand for basic goods, convenience of owning a home is growing at a fast pace too. With growing incomes at both the rural and the urban level, the need to own a house is expected to expand further.
The strong economic growth in the country is contributing to the constant creation of new-buyers, making the sector demand driven. The climbing trend in property prices may be overheated in some segments, but it is definitely not a bubble. The most optimistic view on the rise of prices was expressed for the commercial and residential segment in tier II cities, a view supported by 80 per cent of the survey respondents, followed by the commercial segment of tier I cities.
The present boom in the real estate sector is the result of an ongoing chain reaction that started with the service sector companies. To take in the need for outsourcing activities, these companies needed space to expand their activities. As a result, salaries rose and corporate spending started rising, which lifted other sectors and thereby creating a need for residential complexes in metros.
Already the unemployment rate in Class-I cities has declined by 2 percentage points for both males and females between 1999-2000 and between 2004-2005, it has gone down from 5% to 3% for males and from 6% to 4% for females. The unemployment rate among males in urban India (as a whole) has declined to 3.4% in 2004-05 from 4.4% in 1999-2000 according to a report by the National Sample Survey Organisation. Employment is another major factor in creating a need for residential space.
The interest hike does not dishearten some of the consumers as it has forced property developers to consider some price adjustment. Housing prices across the country have gone down by 5 to 10% in the secondary market. If the current market dynamics continue, property prices will further ease up prompting consumers to buy.