Slowdown at the user’s end

Tags: Opinion

Accumulation of down payments, higher EMIs and persistent high inflation — which reduces monthly savings — continue to affect demand across markets

The residential real estate industry continues to be affected by weak demand drivers. The weakness, of course, is from the point of view of end-users and not investors or speculators, from whose perspective, however, there is perhaps a greater interest in the residential real estate now.

End users, who typically tend to take mortgages to fund their acquisitions, find it difficult to accumulate their down payments as higher household costs depress savings potential. Higher EMIs due to increased home loan rates also limit the amount of loan that they can take. Persistent high inflation, which reduce monthly savings significantly and high interest rates ensure that end users will have to save more before they can purchase their planned residences.

The difficulty is compounded by increasing price of residential units, which are moving relentlessly upwards despite a slowdown in demand. This phenomenon can be partly explained by the inability of developers to absorb increasing input costs, be it that of cement prices, labour costs or even other inputs like sand which due to action against illegal mining has become scarcer and more expensive. Lower cost of steel

appears to be the only


Another explanation may also be the need to keep investors/speculators interested by steadily increasing the price of unsold stock with the passage of time. With demand drivers weakening and prices increasing, the expectation is of lower end user demand, which of course is reflected in muted sales growth in the first half of FY14. Sales in area terms were similar to corresponding last year numbers for most players.

On the other hand the demand from investors and speculators, who are essentially folks with surplus cash looking for higher returns on their capital, appears to have got a boost from

the central governments’ efforts to curtail gold imports. With one important speculative asset class, gold, now being relatively less available and the yield from it is more uncertain due to an import duty which can

fluctuate at the whims of the central government, speculators can and may

already have diverted their surpluses to real estate. This is to some extent

reflected in the launches in the first half of FY14, which were up by about 35 per cent in area terms over the corresponding period last year.

While this demand driver is temporary and may not be sustainable as the assets touched by speculators suddenly become more expensive and, therefore, unaffordable to end users and therefore can block their exit, its potential in distorting markets in the short term are visible in terms of the absurd situation that the real estate market currently finds itself in. Prices continue to increase where as demand growth is stifled.

There is still an expectation of growth going forward, mainly because, the fundamental cause of demand, urbanisation, is still very strong. With Indian urban population expected to increase to 40 per cent by 2030 from 31 per cent now, and the trend of movement of people from rural to urban habitats quite strong, the demand for urban housing, which is typically the subset to which developers cater to, is firmly in place.

The need and, therefore, demand for urban residences is strong and growing. It is only the ability to purchase, which is impaired perhaps temporarily due to changes in fortunes of the salaried middle class, and the demand is expected to come back when this ability gets corrected. The prices may also have to correct to stimulate this demand and that can happen when new projects conceived differently are launched.

The prices of residential units can be brought down or at least made more sensitive to demand and purchasing ability, only when the cost of building residences also becomes flexible. The increasing use of joint property development, where the land owner is given a percentage of the developed real estate instead of a firm price is one important measure to make this happen.

‘Affordable housing’ where some of the elements of cost, such as type of finishing and community amenities are optimised to reduce cost are also measures that can simulate demand.

The strong fundamental trend towards urbanisation, the postponed demand for homes, which just means that households have to save longer to purchase a house and the trend towards affordable housing will ensure that there will be a growth in overall residential units in CY14 and beyond.

While FY15 can in general be expected to be another year of subdued or even lower demand by end users, things can change for the better if the factors such as GDP growth rate increasing to more than 6 per cent, inflation decreasing to about 6 per cent level and interest rate reducing to below 10 per cent turn favourable. In fact, if all factors turn favourable, there is bound to be significant spurt in demand for residential real estate.

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