With affordability and safety of investment being the key criteria for home buyers, the latest round of repo-rate cut by the RBI may see only a marginal improvement in demand and may not act as a catalyst to stimulate realty sales in this festive season. After the announcement of an unexpectedly high 50 basis points cut in repo-rate by the RBI on September 29, it was expected that the move would improve market sentiment, leading to increased demand and more sales, especially as only a part of the multiple rate cuts amounting to 75 bps effected this year before September 29 was passed on to the consumers by banks.
But now within a week of the RBI rate cut announcement, hopes of real estate developers and home buyers seem to have been belied, as banks are yet to transmit the cut onto consumers. The State Bank of India, which earlier on had announced a 40 bps cut in its base rate, has now revised its decision by reducing the base rate cut by 50 percent in order to protect its margins. Few other banks that had announced 20-30 bps cut in their base rates and home loan rates are still hovering well over 9 percent. What is more confusing is SBI’s new policy to offer home loans at 20 bps higher than the base rate to women and 25 bps higher than the base rate to men, in contrast to its earlier policy of offering home loans to women at base rate and to men at 5 bps above base rate. In this scenario, the inability (or unwillingness) of the banks to transmit the RBI rate cut to home buyers is sending negative signals.
This has worried both industry chambers like Assocham and Credai, the apex body of real estate developers who have demanded stimulus in the form of tax incentives and supporting measures like introduction of teaser loans besides passing on the RBI rate cut to consumers. They feel that things have hardly changed during the last one year, with home sales taking a beating. Despite developers trying all sorts of marketing gimmicks including subvention schemes with upfront payment as low as 5 percent of home price, interest waiver for 2-3 years and freebies, sale velocity has not picked up. Rather, it is a matter of concern that during the first half of this year, sales have plummeted by 50 percent.
Both investors and end-users have deserted the residential property market – investors due to a slow moving market with stagnant or dipping prices and end users due to unaffordable prices and concern about the safety of their investment due to massive delivery defaults. These investor-led markets have the largest number of delivery defaults and highest unsold units. NCR today tops with 2.32 lakh unsold units, followed by Mumbai with 1.70 lakh units while Bangalore, Pune and Chennai have 1.11 lakh, 70,000 and 60,000 unsold units respectively.
The extraordinarily high inventory levels and muted sales call for price rationalisation. The RBI governor, Raghuram Rajan, had asked developers to cut prices to spur sales in view of high unsold inventory. Even the Credai chairman, Irfan Razack, immediately after taking over the reins of this developers’ body, advised developers to offload high inventory by rationalising prices. But developers are holding on to prices on the ground that low margins due to steep rise in input costs and high cost of loan servicing, do not give them enough leg room to bring down prices. But what they are ignoring is that the latent demand is not getting translated into sales due to affordability concerns. Today, considering the median house price to average annual income ratio, the affordability is quite low. In Delhi NCR & Mumbai markets, it is double the ideal ratio of 5-6, though in cities like Bangalore the ratio is more or less favourable. Instead of offering direct price discounts, developers are offering indirect discounts in the form of club fee, registration and stamp duty waiver.
Besides unaffordable property prices and high interest rates, long delays in project completion is proving to be a home buyers nightmare. It is a double whammy for them as due to delayed delivery, they are forced to bear the burden of both EMI and house rent, especially when the job market is unfavourable. What’s further adding to their woes is the problem related to house possession. Home buyers especially in NCR market, are slapped with heavy additional undisclosed charges comprising yearly advance maintenance charges, club subscription fee, legal fee for registration etc. Some developers also demand additional charges running into lakhs on account of increase in super-area. In the absence of any real estate regulator, buyers have no option but to give in to the diktats of developers. This has considerably dented the confidence and trust of home buyers.
There is no price relief to home buyers even for newly launched projects. During the festive season, it’s been a standard practice with developers to launch new projects at attractive prices. But this year there is sharp decline (70-80 percent) in new launches due to high inventory and low off-take, besides liquidity crunch faced by developers who are preferring project completion to launching new projects, in order to win back the confidence of buyers. It is not that all is lost for home buyers. Good deals are available in both primary and secondary markets, especially in secondary markets where investors wanting to exit the slow market are today offering discounted properties.
Moreover, there are some attractive offers of ready-to-move-in homes in the market. The biggest advantage of buying such homes is that there are no additional hidden charges by way of inflated super area and you get what you pay for in terms of space, amenities and specifications. You can also ascertain the quality of construction and locality. And above all, there is safety of investment as there is no issue of delayed delivery. Because of this, ready- to-move-in homes are seeing good response from home buyers. In any case, there are takers for good projects at competitive price.
Developers are also banking on NRIs. They are reaching out to them through many property portals and through property fairs at their doorsteps. After the gradual devaluation of rupee against dollar, followed by cut in interest rates, NRIs are taking interest in residential property in India. In addition, there are attractive financial deals and allied services like property management, PIO cards, bank finance and assistance regarding fund repatriation to woo them. Quite a few developers focusing on NRIs are attributing 10-20 percent of their total sales to them.
However, domestic home buyers, especially end-users who form the bulk of customers, are not enthused enough to jump in the fray. They still seem to be waiting for prices to fall. And in the backdrop of the interest rate dampener, it does look unlikely that this festive season will turn out to be a saviour for both developers and home buyers and the realty sector may take longer to ride out the current slowdown.