Moneycontrol Pro Panorama | Boom time for real estate, but is a bubble building?

Dear Reader,

Pent-up demand in the real estate sector continues to propel growth throughout the country. Despite the rising cost and interest rates, the sector has surprised analysts with its growth numbers. But is the growth sustainable?

Let’s first look at the components of growth. A large part of the growth is because of strong numbers from the country’s largest and most expensive real estate market, Mumbai. The city has maintained its record-setting momentum in May despite an increase in ready reckoner rates, stamp duty and higher interest rates.

The city saw registrations of over 9,630 property deals in May, a growth of 80 percent from a year ago. The bulk of the growth numbers was on account of sales in the affordable housing segments and the mid-income group.

A closer look at the numbers shows that homebuyers rushed in to buy properties ahead of the March 31^st cut-off date after which a Metro cess of 1 percent was imposed. According to a Knight Frank analysis, around 37 percent of property registrations executed in May were filed in March, to take advantage of the lower rates.

The profile of buyers shows that 46 percent of the residential property bought were houses priced at Rs 1 crore and below. This is the segment that is most vulnerable to inflation and higher interest rates.

However, there are no signs of a slowdown in Mumbai or other parts of the country. Our interaction with real estate brokers across Mumbai shows that new launches are being lapped up, especially in suburban Mumbai and on its outskirts.

Home loan disbursals continue to remain strong. For FY22, home loan disbursal grew by 13.7 percent to Rs 17.09 lakh crore. Housing finance companies like HDFC posted their best numbers in FY22. An ICRA report on housing finance companies says that growth in FY23 is expected to be in the range of 17-20 percent.

But what about the impact of rising interest rates, is the sector now immune to an interest rate hike?

These are early days in an interest rate cycle, the first round of rates has been increased without any effect on the consumer. In any case, all home loans are now available at floating rates with fixed rates being quoted at more than 100 basis points higher to discourage their usage. Thus, as a home buyer, making a decision based on interest rates is futile as there is no escaping the interest rate cycle.

As for housing prices, expectations are that they will increase. A Reuters poll shows that property prices in India are expected to increase by 7.5 percent on a pan-India basis this year, the fastest in the past five years.

All indicators point to robust growth for the real estate sector as of now. However, any sharp increase in the cost of living can ruin the party.

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