Will property prices crash in India due to the Coronavirus outbreak?

While the popular belief was that property market in India would crash due to the adverse impact of the multiple waves of the Coronavirus pandemic, those predictions now seem to be wishful thinking.

Rates of properties in most Indian cities have, in fact, increased during the July-September period of 2021, after the second wave of the Coronavirus pandemic. According to Real Insight: Q3CY21, a quarterly report by PropTiger.com, Ahmedabad recorded the highest growth of 8% during the quarter on a year-on-year basis

Price growth: City-wise break-up

Source: Real Insight (Residential) – July-September (Q3)2021

*All prices are weighted average prices as per new supply and inventory.

However, there is no denying that housing affordability in India has improved remarkably since the onset of the pandemic in March 2o20. Experts are of the view that properties in India are at its most affordable currently, considering that housing loans are available for interest rates as low as 6.50%, while buyers also have a narrow window to avail of the benefits of the government’s PMAY credit-linked subsidy scheme. Moreover, several authorities have effectuated reductions in circle rates (the minimum rate below which a property cannot be purchased) and stamp duty charges (the tax that buyers have to pay to the state, to get the property title registered in their names). With the ongoing festive season, builders are also likely to offer discounts on property purchases in India, making it the perfect time for investment in real estate in 2021. Put together, these factors have increased housing affordability in India, in spite of the minimal appreciation in values of new properties, primarily fueled by a hike in rates of construction materials and labour shortage

Will property prices fall further in 2021?

While further depreciation in property prices cannot be ruled out, sector experts are of the view that rates might start firming up, once the dull economic situation caused by the second wave of the COVID-19 pandemic improves, signs of which are already visible. Even though economic growth is likely to remain subdued in the first half of 2021, it might bounce back in the second half, provided the impact of any third wave of the pandemic is mild.

As mentioned earlier, housing loan affordability in India continues to be robust, considering the country’s banking regulator, the RBI, has maintained key lending rates at record low levels. Since the RBI-determined repo rate, at which it lends money to commercial banks in India, is currently at 4%, most banks in the country are offering home loans at 6.5% annual interest. They are also attracting borrowers by way of offering additional discounts like home loan processing fee waivers. India’s largest bank SBI, for example, is among the lenders currently offering a complete waiver on home loan processing fee.

Housing affordability in India might improve further, if states start reducing stamp duty, something that the centre has been urging them to do for a long time.

Even though the impact of the Coronavirus-induced economic troubles on property values in India’s mega cities may have been limited, the second wave of COVID-19 pandemic is likely to cause a much deeper overall impact, the positive outlook by industry bodies notwithstanding.

According to a Reuters poll unveiled on May 21, 2021, the devastating impact of the second COVID-19 wave in Asia’s third-largest economy, will stagnate price growth by crushing demand and offsetting the benefits to real estate developers offered by the government in the form of subsidies and incentives. During a poll in January 2021, analysts predicted a 1.3% average growth in property prices.

A recent research report by QuantEco Research also showed that the second wave would hit the Indian economy, by prompting people to save, rather than spend. Considering that housing purchases require big-ticket investments, the demand for homes would be subdued in the period that follows the second and third waves in India. Rates of properties might, thus, be adversely affected, because of the stress on demand.

Unlike the first wave that made bare the importance of housing ownership, as against other assets in the event of a pandemic and thus, acted as a propeller of demand for the housing sector, the Coronavirus second wave may in fact disrupt the demand momentum caused by the first wave.

India is second among the most-affected countries by active cases in the world. On May 30, 2021, the country added 1,65,553 cases to take its total caseload to 2,78,94,800. With 3,460 deaths on the same date, India’s total death toll due to the pandemic has now reached 3,25,972.

Nonetheless, housing affordability in India has improved significantly since 2015. In a report issued on May 24, 2021, JM Financial Institutional Securities Ltd said that housing affordability in India had improved over the years, in view of the fact that annual incomes have been on an upward trajectory while property cost has been fairly stable since 2015.

Increase in rates of raw material may boost property prices

Meanwhile the pandemic-induced spike in prices of essential raw materials, like steel bars, cement, plastic, man-made polymers and resins, etc. are putting pressure on builders to hike prices of new projects. Supply shortage is only making matters worse.

“In the last three months iron prices have increased by Rs 20,000 per tonne, which is almost a 50% increase in prices. Apart from this, copper and aluminium prices have also increased, which has impacted construction costs. At a time when the real estate industry is already feeling the pressure of the second wave and the lockdown restrictions, the rise in prices of raw materials will put the brakes on the recovery of the real estate sector,” said Ashok Mohanani, president, NAREDCO-Maharashtra.

“Once the lockdown restrictions are lifted, we might notice a gradual rise in property prices in the coming months, where the change in percentage may vary as per different markets. In some parts of the country, we may witness minor hikes in property prices by the end of the next quarter, whereas we may see more significant corrections in prices by the end of 2021. All of this will be contingent on the successful stabilisation of the ongoing healthcare crisis in the country by the relevant authorities,” said Jayesh Rathod, executive director, The Guardians Real Estate Advisory.

Amid a slight pick-up in home sales during the January-March period of 2021, India’s eight prime housing markets have shown almost flat price growth, data available with PropTiger.com show. However, housing markets of Ahmedabad and Hyderabad remained exceptions, with both cities seeing a 5% annual appreciation in prices. This growth, especially in Ahmedabad, could, however, be attributed to the fact that average rates of properties in this market are already on the lower side when compared to other cities.

According to a Reuters poll of property analysts earlier this year, house prices in India’s prime cities will barely rise in 2021, despite an economic recovery and supportive policies. The January 2021 poll of 13 analysts showed that average house prices in the country would rise by 1.3% this year, while a rise of 4.5% could be expected in 2022. The poll also showed that property values in 2021 would hold steady in Mumbai, Delhi and the National Capital Region, compared to contractions of 3.25%, 3.0% and 2.5%, respectively, predicted in September 2020. The forecasts in the poll, were based on the assumption that the risk of a COVID-19 resurgence derailing activity was low. Much has changed since then. On May 10, 2021, 3,66,161 new Coronavirus infections and 3,754 deaths were reported in the country, with numbers standing close to record daily highs, amid claims that the peak of the second wave of COVID-19 is on the decline. With this, India currently has a total tally of virus infections at 22.66 million, with 2,46,116 deaths due to the pandemic

Even though the stress caused by the Coronavirus pandemic has impacted India’s key residential markets, the average rates of new projects continue to stick to their previous levels, data available with PropTiger.com show. According to a report by the property brokerage firm, the weighted average prices of properties, in leading markets like NCR and Mumbai showed flat growth in the October-December period of 2020, when compared to the levels seen in the same period in 2019

Interestingly, no prime market showed any downward movement in prices during the one-year period, in spite of the severe pressure caused on growth, because of the pandemic. In what could be termed as significant at this point of time, the average rate of new housing projects in Ahmedabad and Hyderabad, in fact, registered positive growth of 7% and 5%, respectively. Pune, too, recorded a positive price growth of 4% in the past one-year period.

In the coming quarters too, price growth is expected to remain range-bound amid global agencies predicting a long-drawn recovery process for India’s economy. “A combination of supply-side scarring and demand-side constraints – such as the weak state of the financial sector – will keep the level of GDP well below its pre-pandemic path,” Fitch Rating said in a statement, on January 14, 2021.

Terming India’s Coronavirus-induced recession as among the most severe globally, the rating agency said it expected the country’s gross domestic product (GDP) to expand by 11% in FY22 (April 2021 to March 2022) after falling by 9.4% in FY21 (April 2020 to March 2021). “Supply-side potential growth will be reduced by a slowdown in the rate of capital accumulation – investment has recently fallen sharply and is likely to see only a subdued recovery,” it said further.

While the muted price growth, along with several other factors, has increased housing affordability in India to a great extent, low yields might be detrimental to the investor spirit and impact the foreign investment volume in the country, especially from the NRI segment.

Housing affordability is also getting a boost through actions by state governments. The Delhi government, for example, on February 5, 2021, announced a 20% reduction in the circle rates for all types of properties. This temporary reduction, which will stay effective till September 30, 2021, would significantly lower the  cost of property purchase for home buyers in the national capital, especially in the luxury housing segment

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