Will 2020 be a good year to buy house – Should you buy property in the time of a pandemic?
Key Highlights
Affordability has taken a severe hit after the Covid outbreak.
Wealth managers are advising clients to preserve cash and not spend money even on small purchases
Residential real estate prices in the top seven cities in India have seen a marginal rise in the past 4-5 years.New Delhi: The real estate sector which was already in a bad shape due to weak demand and a huge pile of inventory even before the Covid outbreak, will find it difficult to recover after the pandemic as widespread job losses and pay cuts have impacted consumer sentiment. In markets like Delhi NCR, it will take almost three years to clear the inventory, say experts.
Affordability has taken a severe hit after the Covid outbreak. While in 2019 the average annual income required to buy a 1,000 sq ft house came down to 4.5 years in most of the cities according to real estate consultancy Knight Frank India, it is expected to rise further after the pandemic as employees in most of the sectors have taken pay cut.
According to the latest survey done by RBI, consumer confidence collapsed in May. The Current Situation Index touched a historic low and the forward-looking Future Expectations Index also recorded a sharp fall. The two indices are based on the perceptions of 5,400 households across 13 cities on economic situation, employment, price level, income and spending. Both indices are now in the pessimism zone.
While wealth managers are advising clients to preserve cash and not spend money even on small purchases, buying a house, which is a multi-year commitment, is out of the wish-list of many prospective buyers. Wealth erosion due to the stock market crash in March is also weighing on consumer decisions. The losses made on stock investment typically make individuals more averse to spending and impairs their willingness to take risks, say experts.
According to an ET Wealth report, the Knight Frank FICCI Naredco Real Estate Sentiment Index, which captures the perceptions and expectations of industry leaders, has also taken a beating and fallen into the pessimistic territory. “Given these turbulent times, it is not surprising that our survey has recorded its lowest ever sentiment score in January-March 2020,” the publication quoted Knight Frank India Chairman and Managing Director Shishir Baijal as writing in a report.
The report reflects what is happening on the ground. As demand declined precipitously during the lockdown, real estate prices also came down across the country. But they could fall even more in the coming months. Earlier this month, Union Railways and Commerce Minister Piyush Goyal during an online event organised by Naredco, reportedly asked builders to cut prices and clear unsold units. Similarly, at another event organised by Naredco and Credai in April, HDFC Chairman Deepak Parekh said real estate prices could correct by as much as 20%. “Real estate prices have to come down. I believe NAREDCO’s estimate is 10-15%. I feel one must be prepared for even 20%,” the ET Wealth report quoted Parekh as saying.
Will residential property prices fall?
Such estimates have forced buyers to expect huge price cut in property prices in the near future. But in reality, the situation is different. Experts say buyers’ expectations are not realistic. They caution buyers from reading too much into Goyal’s statement. “It is important to understand that the comment was contextual and cannot be treated as hard-lined guidance on price cuts. The debt-equity ratio imbalance for some developers is not new and the advice is directed towards overleveraged developers to not seek further debt but instead rationalise prices to expedite sales,” the publication quoted Anurag Mathur, CEO of real estate consultancy Savills India as saying.
However, he agrees that conversations around price cuts tend to drive down sentiments and could potentially impact buying decisions of certain segments of buyers. “I don’t think need-based homebuyers should hold back as prices have been stable in India for the past 5-7 years, which in an inflationary economy signifies a price correction,” says Mathur.
Others have also pointed to the time correction in prices. “Residential real estate prices in the top seven cities in India have seen a marginal rise in the past 4-5 years. This is lower than even the inflation rate,” Ramesh Nair, CEO and Country Head, JLL India, told ET Wealth.
Analysts say further correction in real estate prices would be possible only if there is enough headroom available to the developer or he is under stress. “We may see price drop in single digits in places where there is oversupply along with weaker fundamentals. In preferred locations where there are quality projects built by developers which are not stressed, we may not see any correction at all,” Mathur added.
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