Why an affordable home is a pipe dream
9 min read 20 Mar 2023, 10:19 PM ISTIn a bullish real estate market, budget home buyers are getting neglected
PremiumSometime in mid-2022, Debashish Bhattacharjee promised his wife, Purna, a new apartment. Having stayed on rent for four years after moving to Kolkata from Bhubaneshwar, it was time to have their own place, he thought.
The Bhattacharjees had three asks: a safe neighbourhood; a location not exceeding a 30-minute commute to their daughter’s school; a ready-to-move-in or almost ready two-bedroom apartment.
The couple, who live on rent in Kasba, a busy suburb in south Kolkata, started house hunting with a ₹50-55 lakh budget in mind. By November, after visiting over a dozen new projects, they upped it to ₹60-65 lakh when nothing fit their budget. The ones they liked were too pricey or were in far-flung suburbs. Next, they adjusted their expectations to buying a resale property. On a recent house hunting weekend, they liked an apartment with a price tag of ₹70 lakh. They asked the owner for a day’s time to confirm but by the next afternoon, it was sold to another buyer.
“The demand for apartments in good locations is so high that there is no scope to negotiate. Ready flats are hardly available and new launches, even in the suburbs, are 15-20% more expensive than market rates. Our broker told us we have to either compromise on the location or increase our budget again," says Debashish.
As home sales peaked over the last two years due to pent-up demand after the pandemic, the cost of home ownership escalated, too.
In their six months of house hunting, not only have property prices gone up in Kolkata, but home loan rates have jumped as well, weakening affordability. In its sixth successive hike in policy rates since May 2021, the Reserve Bank of India, India’s central bank, raised the repo rate by 25 basis points in February. Home loan borrowers, who had taken loans at 6.5% earlier this fiscal, have seen their borrowing cost increase to 9%.
Consecutive repo rate hikes have hit customers taking loans for affordable housing, with demand slackening in the last few months, Mint reported recently. While the rate hikes have led to higher interest outgo for most retail borrowers, the bottom of the mortgage pyramid is the worst-hit. Both sales and new projects in the sub- ₹40-50 lakh category have dipped as a result.
Kolkata remains India’s most affordable real estate market among the metros, at an average selling price of ₹4,850 per sq. ft. But in 2022, the capital city of West Bengal saw a 15% price rise compared to the year before, according to data by real estate advisory Liases Foras, second only to the 20% average price escalation that national capital region (NCR) has witnessed.
Bhattacharjee’s experience underlines the symptoms of a real estate bull market, where as always, the price sensitive homebuyer is impacted. With a sharp spike in luxury home sales, most developers have shifted gear towards premium launches, leaving buyers on a budget with less options.
‘Affordable isn’t viable’
Home affordability was at its highest in 2021, when decadal low interest rates, attractive prices and recovery in household income came together, says property advisory JLL in a recent report.
Now, three critical elements may likely worsen the affordability levels, which started to trend down in 2022 and may continue to do so this year. Household income growth is likely to slow down due to macroeconomic headwinds and inflationary pressure; housing prices are likely to rise further; home loan rates are on an upward trajectory.
Abhishek Kapoor, chief executive officer (CEO) of Puravankara Ltd, a developer, says that demand has been strong for both its brands — ‘Puravankara’, which sells homes between ₹80 lakh and ₹5-10 crore, and ‘Provident’, which costs between ₹45 lakh and ₹80 lakh per unit.
“For affordable homes below ₹35-40 lakh, price and EMI increase have led to demand suffering and squeezed the supply out of the market. I don’t think the impact is as much on the mid-segment or luxury, but builders are being cautiously optimistic. However, a person who was able to afford a 1,400 sq. ft three BHK (three bedroom house) can probably afford a 1,300 sq. ft home now," Kapoor says.
According to data by Anarock Property Consultants, the affordable housing segment (defined as sub- ₹40 lakh) saw its overall sales share dip between 2019 and 2022. In 2019, out of the total sales of nearly 261,400 units across the top seven cities, nearly 38% sales were in the affordable category. In 2022, out of the total 364,880 units sold, only about 26% were in the affordable segment.
Affordable housing also means thinner margins for the developer. With the rise in raw material and land costs, premium projects make more business sense for them.
“Affordable housing isn’t viable for developers because demand is subdued and input costs are higher. One can get a ₹60 lakh product in Gurugram only outside the city, where infrastructure is poor. Anything upwards of ₹3-5 crore has seen fastest sales growth in Gurugram," says Ankita Sood, head of research at Housing.com, a real estate website.
It is similar in Mumbai. Pankaj Kapoor, founder and CEO of Liases Foras Research, says it is impossible to buy a ₹50-60 lakh home within the municipal limits in Mumbai. One has to then look at Navi Mumbai, Thane or extended suburbs like Boisar and Dombivali.
Mumbai-based Macrotech Developers, which has been clocking ₹3,000 crore of sales bookings every quarter, has seen one BHKs contribute only 25% in volume in its affordable business segment, from 65% two years earlier. “We have scaled down one BHKs in our new projects. Two and 2.5 BHKs are where the real demand is," says chief sales officer Prashant Bindal.
Uttarpara, a town in West Bengal’s Hoogly district, is an affordable location not too far from Kolkata, with a large catchment of buyers, who daily travel to Kolkata on work. Shriram Properties Ltd, which has over 300 acres in Uttarpara, has so far built budget homes to cater to the local demand. It is now set to launch 260 luxury villas, each priced at ₹1-1.2 crore.
“It’s a strategic decision. We are confident that there is demand, and we can sell them fast," says M. Murali, chairman and managing director, Shriram Properties.
The ₹7.5 crore flat
On 21 February, Alok Jain, founder of WeekendInvesting, a financial consulting firm, tweeted a photo of people crowding at the office of India’s largest developer DLF Ltd. Apparently, they were there to book ₹7.5 crore apartments in the developer’s recently pre-launched condominium project ‘The Arbour’, in Gurugram’s Sector 63. In three days, all the 1,137 units in the project were sold, for ₹8,000 crore.
“Where is the real estate slow down!!?" Jain asked in his tweet.
The euphoria in buying premium real estate marks the end of the worst phase for NCR, which for years, battled stalled projects, unsold stock, investor exits and low sales. Gurugram has seen the highest price rise for homes, particularly in the Golf Course Extension and Dwarka Expressway neighbourhoods. It is dominated by branded developers such as DLF and M3M Group who haven’t shied away from raising prices, and can command a certain pricing premium. DLF, for instance, launched ‘Arbour’ at ₹18,000 per sq. ft, compared to the current ₹15,000 per sq. ft market rate, says DLF group chief executive director and chief business officer Aakash Ohri.
Pradeep Mishra, founder of real estate brokerage Homents Pvt Ltd, says M3M Capital, a project at Sector 113, Gurugram, had launched at ₹10,000 a sq. ft a year back. It sells at ₹14,000-15,000 per sq. ft now.
In Noida, a more affordable option for budget homebuyers, prices have risen from ₹3,500 per sq. ft to ₹5,000-6,000 today. “On a ₹50-70 lakh budget, the only options are in Noida Extension, and there is limited inventory available. The recent land auctions in Sector 94 proved that land prices have gone up significantly. As more developers like M3M enter Noida, it will further push up prices," says Mishra.
Developers such as M3M and Godrej Properties have bought expensive land parcels in Gurugram and Noida through recent auctions.
Dharmendra Kumar, who had booked an apartment in Ceyanne, one of the two towers in Noida demolished last year due to building violations, is looking to buy an apartment in Noida Extension. Kumar returned to NCR in 2022 to buy what he calls his ‘retirement home’, after working in Mumbai for a few years.
“Noida has changed a lot in recent years. The good thing is that credible developers have come in, but that has also made it less affordable. This time, my wife and I want to buy a ready (to move in) flat, and our son will help with the down payment and loan," says Kumar, who is currently staying on rent in Ghaziabad.
Rents, meanwhile, have jumped too. The average rent for a standard 2BHK of 1,000 sq. ft in Sector 150, Noida, has seen about 23% escalation, Anarock says.
A storm this year
Ever since the pandemic hit, IT sector-dominated cities such as Bengaluru, Pune and Hyderabad saw a surge in home-buying. Companies, globally, pivoted to the digital and consequently, demand for IT services shot up. This, in turn, resulted in IT exporters hiring in large numbers, good salaries, and increments. That good run is over. And a storm is brewing.
In a state of panic, Priyanka Mahesh called her husband on a February morning. She wanted him check out a news on layoffs at his company. By then, GK Mahesh, 44, had already received a mail from the management of the technology multinational he worked in—it was laying off a few thousand employees globally but Mahesh’s job, as a senior engineer, was secure for now. Yet, his confidence was shaken. The Bengaluru-based couple had zeroed in on Sobha Dream Acres, a residential project in Panathur, less than 5 km from Mahesh’s Outer Ring Road office. The price, at around ₹73 lakh, suited their budget. But they decided to hold on.
“We have not cancelled the plan to buy but decided to wait for a few months till the situation in my company settles down. Things are a bit uncertain now, and we don’t want to make a big financial commitment," Mahesh says.
In recent months, several large tech companies have announced staff layoffs amid an uncertain economic scenario. A large number of startups have trimmed their workforces as well given the funding winter they find themselves in.
Real estate experts believe that uncertainties in the job market will have a bearing on home buying sentiment this year. Many consumers may not be inclined towards booking pricier apartments.
“Homebuyers are clearly taking longer in buying decisions. The demand remains high, but we are seeing people deferring. It’s probably because they are worried about their job situation," says Murali of Shriram Properties.
“Genuine homebuyers will be concerned amid talks of a recession. In an end-user driven market, a person buys a house based on the certainty of his future income. In this scenario, they will wait till the storm passes," says Prashant Thakur, senior director and head of research, Anarock Group.
Meanwhile, banks and housing finance companies are offering special rates to attract customers, while some developers are offering subvention schemes to reduce the interest burden on customers. That may not be enough to completely offset the impact of the rate hike. Amit Goenka, CEO and MD of Nisus Finance, a financial services company, says he expects a 15% drop in home sales this year, after the bumper sales in 2022.
Developers, however, may do well to heed the lessons from history. They have tilted towards premium and luxury housing during the boom years of real estate only to repent when the cycle changed. Real estate investors tend to disappear at the first signs of a bear market. Developers, again, could be stuck with expensive homes and fewer buyers.
