Why housing real estate remains a losing proposition

This increase can be attributed to multiple reasons. First, the pent-up covid demand is catching up. This can be concluded from the fact that the growth in bank home loans has been greater than 16% each month from July to October. Second, given that RBI’s HPI tracks prices in 10 cities (Mumbai, Delhi, Bengaluru, Ahmedabad, Lucknow, Kolkata, Chennai, Jaipur, Kanpur, Kochi), the recovery in home prices is yet another example of the K-shaped post-covid economic recovery. 

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Homes in the cities tracked by the RBI’s HPI are expensive, and only the well-off can afford them. Third, the massive gains in the stock market over the last two and a half years must have led to some money moving from stocks to real estate and pushing up demand in the process, particularly for high-end real estate. Fourth, inflation has been high all through 2022. Hence, an increase in prices can also possibly imply that builders have been passing off some of the price rises they have been facing to end customers.

Even so, it makes sense to calculate the real increase in housing prices by subtracting the retail inflation rate from the increase in housing prices during a given period. The retail inflation during July to September stood at a much higher 7% versus the 4.5% rise in housing prices. This implies that once we adjust for inflation, residential real estate across India, on average, continues to remain a losing proposition. This has been true since the September quarter of 2019 (as seen in the accompanying chart).

Further, once we factor in interest on home loans and other costs associated with owning residential real estate, the actual returns fall further.

Of course, there are a few cities where the real return over one year has been positive. These cities are Kolkata, Delhi and Kochi, which saw a nominal return of 8.4%, 8.3% and 11.1%, respectively. These returns are higher than the prevailing inflation.

So, the question is, how will things look through 2023?

Sustained demand for housing continues to look difficult. This stems from the fact that home prices in India have been way too high for a while now. A recent report by Jefferies India pointed out that prices increased by 15% compound annual growth rate (CAGR) for 2004-2012.

However, prices were up by just 2% CAGR over 2013-2020. This tells us there has been no price correction and most real estate that has already been built is overpriced. Of course, there has been a time correction. But a time correction is not enough to clear all the home inventory the builders still hold.

Further, the flats owned by investors are over and above the inventory.

What will further hurt prospective buyers is that interest rates on home loans have increased. The interest rate on a State Bank of India regular home loan varies from anywhere between 8.55% and 9.45%.

Earlier, these rates were even less than 7%. The EMI for a home loan of Rs50 lakh to be repaid over a period of 20 years at an interest rate of 7% works out to Rs38,765. At 9%, it works out to Rs44,986, which is 16% higher.

In this situation, a prospective buyer either has to give up on buying a house or settle for a smaller one. Both are not happy prospects.

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