Lower Housing Prices Needed, Not Just Rate Cuts, Say Experts

The past few years have been bad for the real estate sector, leading to a huge inventory pile-up. Real estate consultancy Knight Frank estimates that the unsold inventory touched 1.5 lakh homes in Mumbai and about 1.8 lakh in the Delhi-NCR region by the end of 2016.

The government's decision to demonetise high denomination currency notes too hurt real estate demand due to a cash crunch in the economy.

But the New Year 2017 started on a positive note for real estate sector with a number of banks cutting down interest rates on home loans sharply. India's biggest bank SBI, for example, is offering interest rate of as low as 8.5 per cent on new home loans.

But analysts say that lower interest rate alone will not do much to boost the real estate sector.
Lower rates "alone may not lead to actual sale of housing units. An ability to service the loan over a long period of time which in turn requires the economy to maintain a high GDP growth will play a key role in decision making prior to the purchase of a house," said Shveta Jain, managing director for residential services at Cushman & Wakefield.

Knight Frank chief economist and director for research Samantak Das says the interest rate cut is only one of the factors that can revive India's realty sector.

For many people, housing prices remain unaffordable, especially in urban areas. "The house price to annual income ratio in Mumbai is 9. It should not be more than 4 at any point of time. This makes the homes in urban areas unaffordable for people. Home developers will have to think about building homes in the price range of average income of their customers," said Mr Das of Knight Frank.

According to Mr Das, a typical 2 BHK home in Mumbai with with built-up area of 800 to 1,000 square feet costs anywhere between Rs 90 lakh and Rs 1 crore. In Delhi, the cost of a 2 BHK with built up area of 1,000-1,200 square feet area comes to around Rs 65 lakh to Rs 70 lakh.

"In both places, the cost per square feet is unaffordable for people. Therefore the developers will have to think of various ways, including a reduction in the ticket size of apartments as well as reducing amenities to bring down cost. Only then people would be able to purchase homes," Mr Das added.

The past few years have been bad for the real estate sector, leading to a huge inventory pile-up. Real estate consultancy Knight Frank estimates that the unsold inventory touched 1.5 lakh homes in Mumbai and about 1.8 lakh in the Delhi-NCR region by the end of 2016.

The government's decision to demonetise high denomination currency notes too hurt real estate demand due to a cash crunch in the economy.

But the New Year 2017 started on a positive note for real estate sector with a number of banks cutting down interest rates on home loans sharply. India's biggest bank SBI, for example, is offering interest rate of as low as 8.5 per cent on new home loans.

But analysts say that lower interest rate alone will not do much to boost the real estate sector.
Lower rates "alone may not lead to actual sale of housing units. An ability to service the loan over a long period of time which in turn requires the economy to maintain a high GDP growth will play a key role in decision making prior to the purchase of a house," said Shveta Jain, managing director for residential services at Cushman & Wakefield.

Knight Frank chief economist and director for research Samantak Das says the interest rate cut is only one of the factors that can revive India's realty sector.

For many people, housing prices remain unaffordable, especially in urban areas. "The house price to annual income ratio in Mumbai is 9. It should not be more than 4 at any point of time. This makes the homes in urban areas unaffordable for people. Home developers will have to think about building homes in the price range of average income of their customers," said Mr Das of Knight Frank.

According to Mr Das, a typical 2 BHK home in Mumbai with with built-up area of 800 to 1,000 square feet costs anywhere between Rs 90 lakh and Rs 1 crore. In Delhi, the cost of a 2 BHK with built up area of 1,000-1,200 square feet area comes to around Rs 65 lakh to Rs 70 lakh.

"In both places, the cost per square feet is unaffordable for people. Therefore the developers will have to think of various ways, including a reduction in the ticket size of apartments as well as reducing amenities to bring down cost. Only then people would be able to purchase homes," Mr Das added.