Home prices stay stubbornly high even as demand slumps
Gautam Belwal is not much of a movie buff. But these days, he spends most Sundays at his rented home catching some action flick or the other. His weekly searches for a twobedroom house in Noida (in Delhi NCR) have come to an end due to soaring realty prices. And as if to add insult to injury, the youngster suffered a double whammy some weeks ago. The multinational IT company he works for doled out a below-par increment, dashing his hopes of buying a permanent home. Sumit Joshi, director of Noida-based Real Credit Consultancy, a small firm that helps home buyers get loans from the big banks, reminisces about the days he would be flooded with calls from customers and bankers. Now, he is the one doing the chasing as buyers stay away and a banker client refuses payment due to unfulfilled targets. Joshi and Belwal have little in common apart from being members of India's increasingly harried middle-class striving to either buy a home or make a living in the fractious, disorderly real estate market. But as prices rise, thanks to inflation and attempts at cartelisation by real estate barons in some parts of the country, and banks turn stingy and overcautious, people like Joshi and Belwal are finding their carefully laid out plans being blown away by this perfect storm. "Our payments from banks are linked to certain disbursement targets we are struggling to meet because of very slow home sales. Where is the business today?" asks Joshi. Home Loan Growth Slows to 12% Joshi has seen a 40% crash in business in the past eight months. But he is not the only one. Across the country, home loan bankers are seeing a sharp drop in business as buyers rebel against high prices by staying away. According to a recent Knight Frank report, Indian real estate prices rose 12% in the past year, the third highest in the world. Reserve Bank data shows housing loan growth slowed to 12.1% for the year ended March 2012 from 16% in the previous year. Also, before real estate prices peaked in 2008, big lenders were managing to grow their home loan portfolio at an annual average of 25%. "Demand in metros has slowed down in April-May. This is mainly due to high interest rates, which have made buyers hesitant to buy property. There are also very few new projects being announced as builders' communities have been affected by high interest rates too," said VK Sharma, CEO of LIC Housing Finance, the country's third-largest housing finance company. Loan growth at LIC Housing Finance slipped to 17% in 2011-12 from 28% a year ago, forcing the company to set a lower target of 20% for the current fiscal. State Bank of India's housing loan disbursement grew 15% in 2011-12 against its target of 20%. The country's largest lender sanctioned Rs 28,000-crore of housing loans last fiscal. "During January-March, there were hopes of business picking up, but April-May has been slack. Typically, this period is slower, but this time around it was slacker than last year. FY2013 has been quite disappointing due to both local and macro-level issues," said a senior official of SBI. He also highlighted that there are markets like Mumbai, NCR and Bangalore that have unabsorbed supply, and in some cases, it is close to two years' oversupply. But what is surprising in all this is that prices are showing no signs of coming down. Though consumers are shying away and there is enough evidence of this and volumes have dipped, debttrapped developers are still not ready to reduce prices of apartments. For the quarter-ended March, prices in the National Capital Region rose 33% while Mumbai and Bangalore posted 17% and 8% jump, a recent report from Liases Foras Real Estate Rating & Research showed. "Demand has slowed down, number of transactions is falling. In the top 10 cities, sales volume has dropped 10% in the last one year. Mumbai is the worst-affected market with a 40% decline in transactions, but prices have remained more or less stable across these regions," said Binaifer Jehani, director, CRISIL Research. Some Mumbai-based developers such as Kalpataru Group, Oberoi Realty, Lodha Developers, Wadhwa Group and Nirmal Lifestyle have actually raised prices in the last few months by more than 10% in Mumbai's central and western suburbs as well as in south Mumbai. Although the hottest property market has an inventory level of over 120 million sq ft, equivalent to 40 months' average sales volume here, not much of this is available for immediate possession. This is helping developers with projects that are close to delivery and resale flat owners seek premium for their units. The NCR, being the largest residential market, faces challenges at unsold inventory levels. However, the market has shown stability and there has been no drastic dip in the sales velocity in 2011-12. In the most stable property market of Bangalore, too, buyers are either deferring their decisions or looking at suburbs to buy properties. "There's a demand-supply mismatch. Only 20-25% of the properties in Bangalore are in the price range of Rs 35-70 lakh category while the current demand is driven by this segment. Around 70% of the buyers are looking to purchase properties in this bracket," said BM Poonacha, head-land and special projects, LJ Hooker Project Marketing India. While apartment sales in the price range of Rs 35-70 lakh have grown 20-25% in Bangalore, there's a drop in demand for property priced over Rs 1 crore, he said. Builders are blaming the civic and urban development authorities for delay in approvals. "Most of the launches are not taking place as there are no approvals coming from the civic authority. Once approvals gain momentum, we can expect project launches to increase, and that can lead to some softening in housing prices. There's no possibility of any cartelisation among developers as each one is incurring huge interest cost for any delay in project launch," said Paras Gundecha, president of Maharashtra Chamber of Housing Industry. Others agree, but what Gundehca is not saying here is that builders are also unwilling to bring down prices and are either delaying launches or selling noncore businesses in order to raise cash and build a cushion for themselves. "Reducing prices might not help in reviving the demand beyond a point, as buyers would expect further drop in prices and defer their buying decisions. Rather, developers are going slowly with their launches," Jehani said. According to her, developers prefer to ease their debt burden by selling land parcels or non-core assets rather than directly reduce prices of their projects. They also feel there's no scope for any price reduction in the first place. By going slow with their launches, builders might open themselves to charges of cartelisation. But so far, very little has been proved and the Competition Commission of India (CCI) did not respond to an ET query on whether a probe was underway on alleged cartelisation by builders. "All input costs have gone up, including government taxes like property tax and development charges. Labour cost has shot up nearly 60%; cement and steel prices have also increased over 30% in the last one year. There's a limit up to which developers can take the hit," said Lalit Kumar Jain, national president of the Confederation of Real Estate Developers Association of India (CREDAI). "It's impossible to expect prices to soften hereon, but at the first opportunity, prices should move up 10-15% to compensate developers against the input cost rise," said Jain. "Developers' margins are clearly under pressure due to rising costs. Operating margins are now around 30-35%. This is a reasonable number to be in the business, but if we remove the rental income some of the developers are earning from their commercial properties, it would move a lot lower," said Aashiesh Agarwaal of Edelweiss Securities. |
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