Explained: Why this may be the right time to buy a home

Over the last one month, several banks and housing finance companies have announced cuts in their home loan rates. While it is a reflection of high liquidity and lower interest rates in the economy, the cut also means that there is a growing demand for new home loans, and no bank or HFC wants to miss out on that. Industry experts feel prospective home buyers may find this time suitable, given the discounts on offer by builders and low interest rates in the economy

Why has demand been rising?

Demand for housing rose sharply in the two quarters between October 2020 and March 2021 following the first wave of Covid-19. It was helped by factors such as a cut in stamp duty by several state governments, discounts offered by developers, and low interest rates. The pace slowed down in the quarter ended June 2021, following the second wave of Covid, but has picked up again over the last couple of months, with broader opening up of the economy, improvement in pace of vaccination, and rise in economic activity

A senior official with a leading housing finance company said Covid-19 has been a big driver of demand for housing as people have realised they need more space in the house for work from home, education, quarantine among others. “While many who were comfortable living on rent, now feel the need for a their own home following Covid, there are many households who are now looking for a bigger house following the space requirements of work from home and kids attending their classes from home. In urban areas, a large number of people have felt the need for a bigger house and those who can, are going for a house with some more space,” he said.

Industry players say that with work from home becoming the norm for many employees across IT and other service sectors, many individuals are now looking to buy a bigger house even if it is further away from their workplace or central district area

The uptick in demand over the last one year has resulted in a price hike in certain cities. The Residex — the housing price index updated every quarter by the National Housing Bank — rose in Delhi from 91 in December 2020 to 95 in March 2021, in Noida from 104 to 108, and in Bengaluru from 116 to 118 in Bengaluru. While it declined in Mumbai from 106 to 105, it jumped in Navi Mumbai from 107 to 118

Are prices going to rise?

Both experts and industry insiders feel prices will not rise in a hurry as developers are looking at pushing sales to improve their cash flow, inventory levels are high, and fresh supply is coming in, albeit at a slower pace.

“While the all-India average inventory at the end of March 2021 had come down to 42 months, it has now gone up to 48 months (following the decline in sales after the second wave of Covid) and there are around 12.5 lakh unsold units across 60 cities. This a way too high and the demand has shifted to ready inventory,” said Pankaj Kapoor, founder and MD of Liases Foras Real Estate Rating and Research Pvt Ltd

Even the official with the HFC said “nobody is expecting property prices to shoot up” as there is enough supply in the market. Even if there is demand, he said supply won’t be an issue as “use of new technologies can bring supplies faster”. He added, however that there could be a 10-15% rise in prices as commodity prices are rising and the cost of labour has also gone up following the movement of workers back to their home states.

Should you buy your house now?

If you have been saving to buy a house, this is a good time. Kapoor said it is a “buyers’ market” as there is enough supply and even the developer is looking to increase sales to boost cash flows. At the same time, interest rates are attractive. Apart from a lower EMI, a bigger advantage is that a lower interest rate increases the eligibility of a customer. For example, if you are eligible for a loan for which the EMI should be up to Rs 50,000, then, if at an interest rate of 8% you can take a loan of Rs 60 lakh, at a lower rate of 6.7% the loan amount can go up to Rs 66 lakh

Industry insiders say developers are under stress as construction activity dropped by around 40% because of Covid. “It is a good time to buy, but homebuyers must go for ready projects. If builders are under pressure, they are bound to give discounts to increase volumes and then it is a buyers’ market,” said Kapoor.

It makes sense to buy a house for your own use, but not as much to buy a house for investment. Prices may not rise in a hurry, given the high inventory levels and fresh inventory too coming in

Should you also invest in real estate stocks?

Amid the equity market boom, there has been a sharp rise in real estate stocks too. Strong sales by blue chip real estate companies in the metros have led to the NIFTY Realty Index more than trebling from 160 in May 2020 (monthly closing basis) to 525 in September 2021.

Analysts point out, however, that the bull market in real estate is supported by low interest rates, recovery in the economy, recent reforms that have enhanced the confidence of both investors, and first-time buyers. “This is not possible without the collective confidence of the market participants. It also indicates that the sector is bound to return to the growth cycle seen during the real estate bull market prior to 2008. Investors can participate in a staggered manner depending upon their risk appetite and holding period,” a financial market participant said.

Apart from using the mutual fund route to investment in real estate stocks, investors can also look at purchasing units in Real Estate Investment Trusts, or systematic investment plans in top real estate company stocks to take exposure in the realty market

Unlike a one-time investment in a flat or a piece of land, investment in real estate can be done bit by bit without the hassles of managing properties. These investments are also more liquid, and provide the option to average your costs in case prices fall in intervening periods

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