The Reserve Bank of India (RBI) data released last week showed that housing as an asset class is not doing too well. For the April-June quarter (Q2 2018), the average pan-India housing price grew at 5.3% year-on-year (y-o-y), compared to 8.7% in the year-ago period, and 6.7% in Q1 2018.

Does this imply slower demand expansion when compared to supply, leading to prices cooling off?

One would have thought that the gradual improvement in new launches seen in the June quarter, after a 12-month lull, would have translated into higher demand, too. But sales have continued to be tepid except for an increase in the affordable housing segment.

According to Nomura Securities Ltd: “Housing as an asset class has underperformed due to high interest rates, lower inflation, affordability concerns and policy efforts to increase transparency."

Corroborating this, RBI data shows a cooling off in the pace of growth in prices. From an average 18% annual rise between 2010 and 2015, the price rise in the first six months of the current year is down to 6%. Further, growth forecasts have turned gloomier following the liquidity crisis created by rising defaults and non-performing assets in non-banking financial companies (NBFC) and banks. A Credit Suisse report highlights that NBFCs and housing finance companies (HFCs) have played a major role in credit supply in recent years, accounting for 25-35% of incremental overall credit. Even as bank credit growth in the last two years averaged 7%, strong 20%-plus growth in NBFC credit aided overall credit expansion beyond 10%.

The situation may be slightly better in non-metro cities, where the government thrust for affordable housing has propelled growth and also in small-ticket home sales.

That said, the real estate sector has a strong correlation to credit availability, both in terms of retail borrowings and corporate debt. So, any credit crunch in the economy or rise in interest rates would impact demand growth.

Indeed, the move by the central bank to boost credit growth in NBFCs/HFCs is positive. However, in the current scenario, where real estate sales have been extremely slow and a substantial amount of projects are running behind schedule, banks might not be willing to lend.

Apart from weak residential sales, the rise in input costs and higher promotional expenses, along with compliance costs, would lead to increased pressure on Ebitda (earnings before interest, tax, depreciation and amortization) margins. The sudden and sharp drop (20-30%) in share prices of real estate stocks, following the NBFC and banking sector meltdown, is, therefore, not surprising.

That said, there could be exceptions to such forecasts. Realty developers in the listed universe, such as DLF Ltd, Phoenix Mills Ltd, Oberoi Realty Ltd and Godrej Properties Ltd, which have trimmed debt or have reasonable presence in commercial or retail assets, or with a sizeable exposure to mid-income housing, where growth has been higher, could emerge stronger as they weather the challenges.

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