Industry
What's driving up housing prices in India?
Summary
- Robust demand, high construction costs and lower fresh supply have driven the price of residential real estate. It has impacted affordable housing.
As the day of the Union Budget nears, there is a growing expectation in the real estate sector that the government will push affordable housing with tax breaks and other policy measures measures, especially in the context of rising house prices. The Knight Frank Global House Price Index for the third quarter of 2023 ranked India 14th globally, up 18 positions from the previous year, with an average 5.9% increase in house prices over 12 months.
According to another housing prices index maintained by the Srini Raju Centre for IT and the Networked Economy at the Indian School of Business, the 12-month period ended September 2023 saw the biggest annual jump across one-, two- and three-BHK houses in the last six years. The biggest rise, of 7.3%, was in the 2-BHK segment.
Meanwhile, the share of affordable housing (less than ₹40 lakh) in new supplies has been shrinking in the top seven cities, from 24% in Q3 2021 to 18% in Q3 2023, according to Anarock, a property consulting firm. In Q3 2019, this segment accounted for 41%. This drop is driven by several factors, including higher land value and construction costs.
A government boost is seen as essential to reverse this decline. An Ipsos survey last year found that 65% of urban Indians who do not own homes fear they may never be able to afford one. Real estate prices vary from city to city, depending on local factors, including new supply, absorption and rentals. However, high interest rates could moderate housing price inflation.
Local drivers
In the top seven cities, house price increases in Q3 2023 ranged from 1% to 19%, with Hyderabad (19%) and Bengaluru (18%) leading, as per the Housing Price Tracker by CREDAI, Liases Foras, and Colliers. These two cities also saw big jumps in rentals last year, coinciding with the return-to-office mandate imposed by several IT companies.
According to Anarock, rentals in India's top cities went up by over 30% in the first nine months of 2023. This partly increased the demand for house ownership, from those who wanted to escape the huge jumps in rentals. This, in turn, pushed house prices up. Housing prices in the Mumbai Metropolitan Region (MMR) increased only by 1%, in part because its average base price per square foot of ₹19,585 is the highest among Indian cities. Within MMR, Navi Mumbai saw a year-on-year increase of 11%.
Supply control
When the pandemic hit, many builders were saddled with large unsold inventories. As demand picked up, the industry limited supply, and that kept housing prices elevated. According to data from PropTiger, while purchase of houses dropped by 6% in Q3 of 2023, new supply dropped by 12%. As a result, housing prices remained high, while the unsold inventory dropped from 571,000 units in Q3 of 2022 to 508,000 units in Q3 of 2023.
Prices have also been high due to rising construction costs. In its December 2022 report, real estate consultancy CBRE noted that a combination of factors, including high inflation, geopolitical crisis in Europe and covid-related lockdowns in China, pushed the costs of steel, cement, aluminium, PVC and other construction materials globally. However, in 2023, while fuel and construction material costs moderated, labour costs went up. As a result, real estate companies limited supply to protect their margins.
Cheap money?
Access to finance has also fuelled housing demand. Individual loans as a percentage of total banking loans rose from 28.9% in 2021 to 33.2% in September 2023, with housing loans comprising nearly half of all retail loans. Private sector banks have been particularly aggressive in housing loans, with a year-on-year growth of 87%.
While interest rates were low during the first two years of covid, they have risen amid concerns about inflation. The base interest rate of State Bank of India rose from 7.3% in December 2020 to 10.1% in September 2023. Yet, demand has continued to rise. This has impacted the affordable housing segment, with average monthly loan installments shooting up 20%, according to an analysis by Anarock. That’s one reason why many expect sops for this segment from the budget.
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