Economic Survey 2020: Housing prices remained elevated, builders must be willing to take ‘hair cut’

Housing prices remain elevated and real estate developers should cut home prices to clear unsold inventory, according to the Economic Survey 2020.

“Housing prices have remained elevated, even though growth in prices has fallen sharply since Q1 of 2015-16 and remained muted since then. As at end of December 2018, about 9.43 lakh units worth Rs 7.77 lakh crore with 41 months of inventory are stuck in various stages of the project cycle across top 8 cities," it said.

“Existing unsold housing inventory can be cleared and the balance sheets of both bank/ non-bank lenders cleaned if the real estate developers are willing to take a ‘hair-cut’ by allowing the house-prices to drop,” it said.

The decline in household investment in ‘Dwellings, other buildings and Structures’, over 2011-12 to 2017-18 is a reflection of slower growth in purchase of houses by households.

“The real estate sector, and residential property, in particular, has been reeling with issues of delayed project deliveries and stalled projects leading to a build-up of unsold inventory over the years,” the Economic Survey 2020 noted.

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Government’s thrust on affordable housing is evident, in order to boost the real estate sector and consequently the construction activity in the country. Higher investment in housing by households may increase the fixed investment in the economy, it said.

"For the Indian real estate sector’s woes to end, the government needs to announce effective measures that will boost residential sales and thereby ease at least some of the overall liquidity issues. Numbers indicate that total real estate loans (by both banks & NBFCs/HFCs) equal nearly USD 93 bn of which approx. USD 14 bn or 16% is under ‘severe’ stress," said Anuj Puri, Chairman – ANAROCK Property Consultants.

‘Severe’ stress implies that there has been high leveraging by developers who have either limited or extremely poor visibility of debt servicing due to various factors. If residential sales pick up, such developers would be in a better position to service their loan amount, thus benefiting both banks and NBFCs.

Moreover, the issue of large unsold stock (of approximately 6.48 lakh units across the top 7 cities) with developers needs to get cleared to a significant extent. As for property prices, they are already at their lowest best across most cities and the prospects of them reducing further are extremely low. Nor are prices the sole reason for lack of demand. In fact, as much as 36 percent of the existing unsold stock is in the affordable price bracket of Rs 40 lakh and below, Anarock said.

Overall, the sentiment is also low because the high unsold inventory reduces buyer confidence, and because too many projects do not meet existing demand in terms of locations and sizes. Also, prospective buyers currently lack overall financial confidence to make such significant and protracted financial commitments.

"This lack of confidence can only be overcome by better job generation and employment security. In the boom years, demand remained healthy even when prices were higher because overall financial confidence was good. Also, because prices were appreciating, investors had sufficient motivation to make housing plays," Puri added.

“The survey rightly notes that home sales are essential to maintain the sector's cash flows and ability to service debt. The stress of unsold inventory has been impacting the balance sheets of NBFCs which have a large exposure to residential projects and there is a credible risk of further defaults.

"Developers need to focus on completion and timely delivery, but price reduction has been an on-going kerfuffle and might be challenging. Prices have already corrected in several markets and any further reduction is likely to be driven by financial duress than business economics” said Aashish Agarwal, Senior Director (Head- Advisory Services) at Colliers International India.