Is there a boom in the housing market?

(Representational image) There is unsold inventory of over seven lakh homes today.

A common refrain among the real estate fraternity has been that “this is the best time to buy a house”. This narrative was being circulated even before Covid-19 decided to play spoilt sport. Even though the real estate market in general and the housing market in particular has been going through a turbulent phase, the narrative never changed.

If this is the best time to buy a house, then when was the worst time? This raises the fundamental question as to what are the signs of a healthy real estate market. What are the fundamentals that support or reject the narrative of the best time to buy. Here’s the ‘booming market’ test.

Job market

Higher job-hopping rate is more often than not good news for the economy and the real estate business. While at a micro level, it may affect the individual, at a macro level, it is a sign that the youth are getting jobs and their seniors are getting better opportunities. Historically, the real estate market has weathered even the double digit interest rate and inflation with higher housing sales numbers. The housing market has been witness to 13 interest rate hikes on home loans in 2011. The home-loan rate spiked from 10.25% in 2008 to 13% in 2012 but the period also witnessed consistent growth in sales. The reason was more job opportunities. Real estate today fails this booming market test.

Demand exceeding supply

One of the fundamental reasons why Indian developers could earlier sell a future product is that the demand far exceeded supply. Today, with an unsold inventory of over seven lakh, it would take no less than 44 months to sell. By the most optimistic assessment, the demand and supply equilibrium doesn’t indicate a booming market. Real estate clearly fails this test.

More new launches

Higher the demand, more would be the launches. That is how businesses across the board operate, and real estate is no exception. In the last three-four years, new launches have been few and far between. Only a handful of national-level developers with a proven record have been able to launch new projects. For most, new launches are more of a liability. Not every developer can afford to launch a new project and sustain buyer interest even after project completion. Fewer new launches indicate a bearish housing market.

Appreciation higher than borrowing cost

Homebuyers have strangely been silent about the issue of quality of housing. The silence is not borne out of their satisfaction but the economics of FOMO (Fear of Missing Out). When appreciation was over 15 per cent year-on-year, buyers’ bargaining power was limited as housing projects were being absorbed by investors. Even if the buyer protested, the developer could easily refund the amount and resale the unit at a higher price.

Today, with appreciation in the range of 1-3 per cent and the borrowing cost around 6-7 per cent, the market fails the booming market test.

Higher rental returns

World over the gap between borrowing cost and rental returns define the direction of the housing market. The lower gap not only limits the buyers’ risk profile but also compensates for the lack of capital appreciation. In the Indian context, there is a wide gap between the borrowing cost and the rental returns compared to what it is globally. Real estate fails the booming market test here.

Distress sales

Secondary market is a key indicator of the health of the housing market. It is a litmus test of actual demand and supply since the primary market has the capacity to absorb the variables due to developers’ holding capacity. Today, there are very many distress deals available in the secondary market. Covid-19 has made a huge dent on middle class households, especially those reeling under job losses. These buyers are forced to sell their properties at distressed prices.

The industry narrative only talks about property registrations but doesn’t segregate primary and secondary sales. Distress sales in the secondary market are also affecting the primary market. Real estate fails this parameter as well.