Is the price of real estate in India likely to come down in future?
Following the impact of Covid-19, most Western economies have created oceans of liquidity once again. Treasury bond yields are now close to or below zero as a result of this. As a result, within the following twelve months, one might expect to see this extra money making inroads into Indian real estate. By 2022, the only probable consequence will be a real estate resurgence.
Basic Analysis — While each Indian city’s real estate market has its own personality, most large cities have adopted the Mumbai model. Because Mumbai is India’s largest real estate market, it will continue to shape national patterns. The majority of local indications in Mumbai presently indicate that the Mumbai market is about to go down.
Income vs. EMI — Homebuyers have seen their income drop as a result of the lockout. Incomes, on the other hand, have risen throughout time, while property values and interest rates have fallen. As a result, we now have a situation where the EMI-to-income ratio has decreased from around 50% in 2014 to around 25% in 2020. And this is a very positive sign.
Demand vs Supply — The high level of debt on a developer’s balance sheet prompted them to liquidate inventory to meet their loan commitments over the last three years. As a result, market prices have been decreasing. This pressure will decrease as more money enters the system, resulting in much-reduced stress levels and fewer discount deals. Furthermore, the number of developers in Mumbai has decreased by 40%, resulting in a further tightening of supply.
Mumbai’s annual sales of 25,000–30,000 residential units have remained consistent. In a bear market, steady sales suggest that end-users have nearly entirely dominated the market (most investors prefer investing in a rising market). The annual supply of housing units in the Mumbai market has been decreasing, which validates early signals of an oncoming bull market. In reality, over the last two years, supply has trailed behind actual demand, resulting in a reduction in inventory overhang. As a result, we’re not far from the inflexion point.
Cost of developers — The assumption that a drop in demand for new homes or a drop in their pricing would result in a drop in land prices is flawed. This is due to the exceedingly restricted amount of clear title open land. Redevelopment accounts for the majority of new home production in Mumbai. The cost of rehabilitating the tenants is largely included in the cost of land in redevelopment projects.
The cost of restoration has risen dramatically over time as a result of regulatory changes and growing tenant demand. As a result, there are few restoration projects that can be completed for less than Rs 20,000 per sq ft of carpet space.
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