Why Builders Won't Drop Home Prices

'What happens in the real estate market is that once the prices go up it goes on to stay at that level.'

'It might not increase and at the same time the prices will not come down too.'

India's housing sales touched an all-time high in 2023 and it was expected the momentum would continue in 2024 too.

The three housing segments -- mid-income, premium and luxury -- saw unprecedented growth in spite of high prices and increase in home loan rates which were hovering around 9 percent, up from a low of 7 percent during Covid times.

Around 271,000 units were sold in Delhi, Mumbai, Hyderabad, Bengaluru, Kolkata, Chennai and Pune.

The year 2023 showed a growth of 26 percent year on year basis and it looked like the trend would continue in 2024.

However, in the April-June quarter home sales which were on fire cooled down, holding out hope that prices of homes would fall eventually because what goes up has to come down.

But will the slowing down of sales lead to a reduction in prices of homes which are at an all-time high?

What does the future hold for the housing industry?

Will homes become affordable in the near future?

To get answers to these questions, Syed Firdaus Ashraf/Rediff.com spoke to Dr Prashant Thakur, Regional Director & Head - Research, ANAROCK Group.

According to your report, Home sales in India cool down after two years on high base, rising prices, the April-June quarter gave a lot of hope to new home buyers who are hoping for a price correction in the property market.
Does this cooling down effect tantamount to fall in property prices in India?

Not any time soon. First of all, you have to understand that sale of property is very high for the last two years. This cooling down effect is on a very high base.

If you recall, the January to March quarter of 2024 saw the highest ever sales as 1,30,000 (home) sales were done in the top seven cities of India.

Any specific reasons for the cooling off of housing sales in the last quarter?

A couple of reasons like the heat wave and the election season. Due to extreme heat a lot of site visits did not happen in the last quarter.

Therefore, it is too early to say that you will see a further decline in home sales. The launch site (of new projects) is very strong.

We will have to wait for one or two quarters to see (this trend) and only then can we say that there are (real) signs of cooling off.

Home buyers would want to know, will there be a price correction in house sales in the coming days?

The prices have significantly shot up in the last two to three years. What happens in the real estate market is that once the prices go up it goes on to stay at that level.

This goes on for an extended time. It might not increase and at the same time the prices will not come down too.

Even if you go back to five years ago, in 2019 the prices did not shoot up but remained stagnant. But it never went down.

The developers did not increase the price but at the same time did not reduce the price either.

In my opinion, price cut won't be there but builders will do a pseudo price cut by maybe giving offers or some freebies or things like that.

For example, woodwork units (furniture) or things like that. And prices, I don't think will rise or escalate from here on for a couple of more quarters.

In terms of price, does your research find which range of housing has fallen? Affordable homes below Rs 50 lakh or above Rs 1.5 crore homes which are premium homes, or luxury homes which are above Rs 3 crore?

Overall, when prices shoot up significantly investors tend to take a pause. There is no point for them to put in money when the prices are already up.

Investors do not hold flats for a long time. Once investors start to withdraw, the markets start to slow down.

But what we saw was the market was primarily driven by end users and only in the last two quarters we saw the increased amount of participation from investors.

As far as cooling effect is concerned, it is happening in the price range of Rs 85 lakhs to Rs 1.50 crore where the actual end users are there.

Your research paper says as many as 120,340 homes were sold in the April-June quarter against 130,370 units sold in January-March, a dip of 8 percent.
Is this a significant drop? When was the last time we saw such a drop?

Eight percent on such high sales is not a significant drop. This if we take into account was an election year and heat wave, especially in the North that is Delhi-NCR region.

Lot of site visits did not happen as I told you earlier because of extreme heat waves.

The last quarter also happened to be summer vacation time and many families tend to go on holiday.

Obviously then, site visits do not happen. Therefore you cannot say a fall of 8 percent contributes to weakness of the market.

So, I will not be able to call it a slowdown until and unless I see the results of one more quarter.

Normally too we have the third quarter as a slow period because it is the monsoon and the shraddh period.

What was the appreciation in the last five years in terms of percentage for home buying? And why do you think a bull-run happened in home buying in India?

After Covid a couple of things happened. Before Covid the housing sector was at a standstill, the prices did not go up and there was unsold inventory in the market.

During Covid people understood and realised the importance of having a physical asset and at the same time consolidation (better managed projects) happened from the builders' side.

The home loan market too was around 6.5 to 7 percent for high credit rating people before it started moving up.

People saw the interest rate was at rock bottom and a huge amount of inventory lying around.

RERA too played a role as it cleaned out (the mess in the construction business).

Prices were affordable too at that time and we saw an initial surge of activity in the market which helped the developers strengthen their balance sheet.

Once the cash flow started happening they started repaying their debts. This phase of revival was led by good grade 'A' strong developers. People were confident as RERA was in place and 80 percent were end home users.

Slowly later, interest rates went up but it was nothing compared to 2015 when it was 14 percent as far as I remember. Today, it is in the range of 8 to 9 percent.

Work from home culture was also a trigger point as people started buying bigger homes in the periphery.

India was already a housing deficit country. People wanted to buy but because of shady people they were not buying.

Once the sector became clean people started buying. They believed 'paisa daalega toh ghar milega' was a surety.

This was not the case earlier. RERA made this possible as people know where to go and register a complaint.

And now you have builders like Godrej, Purvankara, Prestige and many others who made the home buying process transparent.

Real estate expert Vishal Bhargava says that the Mumbai property market is getting Lower Parelised where supply is more than demand, giving the example of Lower Parel area where currently 10,000 construction projects are on.
Do you believe such a thing could happen?

It will happen in a very long run term. Real estate is primarily driven on sentiment and euphoria.

Right now the sentiment is very positive. Everybody wants to have a piece of land or an apartment in city.

The way supply is growing, so is infrastructure development which is growing rapidly in Mumbai.

And if you look around Mumbai you will see that every nook and corner of the city is being connected with flyovers and metro which will make Mumbai a different landscape.

Is it possible that builders will have to go for a price cut if they want to sell their inventory?
Do they have holding capacity if there is no sale?

Announcing home price cut for builders is very difficult. They might go for pseudo schemes like giving a free modular kitchen or so.

If I am a developer and when I am taking construction finance my cash flow is based on the number of units that I am selling at a certain price.

And there are certain investors who have bought my property at a certain price; now if all of a sudden I announce a price reduction I will have to put additional collateral with the bank.

(Because by reducing price) value of my collateral will come down.

And my investors in turn will come to me and say that I promised them an appreciation as a builder and here I am announcing a price cut.

So the builder cannot announce price cuts because these investors are the same set of people who will put money in his next project.

It is a vicious cycle. It is not a simple calculation where an automobile company announces a Rs 50,000 cut in selling their cars.

So at best the builder can give you a free modular kitchen like car sellers give you a discount to encourage enablers.

GST waive-off or such things but they will keep the base price of their homes intact.

Why have we come to a situation in India where a couple earning around Rs 1.5 lakh to Rs 2 lakh per month is unable to buy a decent 2 BHK flat in any of the decent localities in different cities because of unaffordable prices?
It looks like builders want to sell flats only for investors.

That is the sad part. In Gurugram, 75 percent of launches in this quarter that have come are in the price range of Rs 1.5 crore and above.

At one point of time Rs 1.5 crore homes used to be a luxury apartment in NCR but today it has become the norm.

So, the clients wanting to buy in the range of Rs 85 lakhs to Rs 1.5 crore have been completely wiped out.

So, I think somewhere a course correction has to happen. What happened actually was that the land prices got very high (in Gurugram) and I as a developer acquired the land at such a high cost that I will have to ensure my money is recovered and make enough margins.

This can happen only if I launch high end projects.

As an astute businessman I will go with the flow because the developers are not here for social cause.

They have to make money and they see luxury homes are selling like hot cakes.

Is there a study where we can find out how many genuine buyers who buy homes for end use vis a vis investors who buy homes in India?

It is very difficult and we cannot find out. How can you find out whether this purchase is by a genuine buyer or an investor?

We often read headlines about homes getting out of reach for the middle class. And for the last two years we saw a boom in property market as homes were selling like hot cakes.
Who were these people who were buying homes?
What was their economic status or income generated in their household that saw such drastic buying of homes?

Nothing like that (has come to my notice).

Is GDP growth, which is hovering around between 7 and 8 percent in the last two years, a reason for home buying in India?

It is the generalisation. If I believe in the Indian economy (growing) then the first thing that should reflect that is my salary (slip).

And then the first indication you see is that discretionary spending goes up. I go for holidays or buy a car.

Buying a home is not something like one day you feel confident and go to buy a home by paying EMI. It is a lifelong liability. Till the time wealth creation is not happening and that too long term wealth creation (people don't go and buy homes).

No doubt the Indian economy is on a strong footing but still there are a lot of faultlines.

This growth is not even and the bottom of this pyramid is suffering.

They are still recovering from the impact of the pandemic. If you see every sector which has recovered, for example, the automobile sector where SUVs and high end cars are selling well.

The entry level cars are not selling well and the same case is for housing or white goods.

Does it mean that the 'K' theory of growth in India is the real story of the housing sector of India where a certain elite group is growing and buying homes whereas the lower income group people are unable to buy homes and they are falling behind?

Exactly, it is the K theory in housing sales. It is only top end homes that have pulled up the market and the affordable homes which are below Rs 45 lakhs are yet to catch up.

It is yet to catch up and in fact it has decelerated both in terms of launches and sales.

This is not the case of real estate alone but the entire Indian economy.

I am therefore hopeful the government in this Budget will take a lot of measures to boost job creation, manufacturing, infrastructure and also announce a lot of measures for affordable housing.

That is how you can crank up the lower strata of the income.

Feature Presentation: Aslam Hunani/Rediff.com