India’s housing market has been in a prolonged slump, made worse by sweeping regulatory changes in the last two years. Nevertheless, some cities have seen price increases – pointing in the direction of a “two-speed” India. Now, early in 2019, The National Housing Bank claims that prices rose by up to 22% in 33 cities. Yet no one seems to be able to agree and estimates vary on real estate sales, and on how they actually fared in 2018, when compared to the previous year. Various real estate groups and consultancies are giving conflicting figures with some saying sales are flat and others saying that the top seven cities in India grew substantially.
National statistics, disregarding the performance of the 33 cities that outperformed, alludes to different figures. The top nine cities started 2018 with a slight appreciation in prices of between 1% and 3% with developers focusing on affordable housing projects. There has been a keen interest from buyers looking for smaller apartments and also for bargains in areas with falling prices.
Hyderabad had the highest increase of 5% to Rs3.970 per m2. Bangalore and Chennai both had a 3% increase and prices were at Rs 4,822 and Rs 5,044 per m2 respectively. Ahmedabad rose by 1% to Rs2, 942 per m2, while Gurgaon had no changes. Mumbai and Kolkata saw price decreases of 1% and 2% respectively with Mumbai selling at Rs8, 153 per m2 and Kolkata at Rs3, 822.
India implemented demonetization of Rs500 and Rs1, 000 notes late in 2016, in a move to discourage tax evasion. This move nullified 86% of the country’s banknotes and was expected to seriously affect the property market; typically homebuyers in India pay 30-40% of the home value in cash to, avoid taxes.
In the initial period, after demonetization, Indians began scrambling to move their cash offshore to countries like Dubai and Mauritius, causing a general economic slump in the country. This development seems to have whet the Indian appetite for foreign assets, investments and properties.
According to property consultancy, Knight Frank, significant real estate slowdown was observed in Q4 of 2016 and India’s eight major cities registered 44% drop in sales volumes year-on-year, the lowest level since 2010. This was after a 7% increase in the first half of the year. Despite a drop in home prices, Knight Frank reports, that the first half of 2018 was as flat as the first half of the previous year, with a slight recovery in between.
Another contributor to the slump is the difference in buyer and seller price expectations, leading to huge inventories of unsold units. There are also delays in project execution, litigation on land disputes and other matters which are also holding back the market as a whole.
Even though housing prices have risen strongly in India since 2011, rents have not kept up. The gross rental return is low in all of India’s major cities.
South Mumbai’s gross rental yields are at 2.4%, but apartments remain expensive, placing Mumbai in 13th place of the world’s most expensive cities for property buyers.
New Delhi has lower prices per m2, but has low gross rental yields of 2%.
Rental yields are higher in Bangalore and vary from 3.35 to 4.12%, well below the yields which could be obtained in 2007, which were anything between 7.16% and 9.92%.
Kolkata fares a bit better than New Delhi, with gross rental yields ranging from 2.8% to 4%.
These low yields suggest that property prices in India are over-valued.
Taxes and costs
Rental income is taxed at a progressive rate, from 10% to 30% on the net amount.
Capital gains are taxed at the same rate as standard income.
No inheritance or gift tax is applicable in India, but a 1% wealth tax is imposed if the net wealth exceeds Rs 10 million.
Residents are subject to a progressive tax which ranges from 10% to 30% on their worldwide income.
Buying costs vary between cities because of differences in stamp duties and registration fees, but will be in the region of 8.75% to 15%.
The laws in India are pro tenant. There is rent control and in Delhi, the maximum annual rent is 10% of the cost of construction and the market price of the land. These prices are based on historical value and not on current market value.
Landlords have great difficulty in protecting their property from unwanted tenants. Contracts are enforceable but can get stuck in the judicial system for prolonged periods, sometimes even for decades.
Despite demonetization, India’s economy remains healthy and the IMF projects real GDP at 1.5% for 2019. The economy has been helped through various fiscal reforms, which include the implementation of a Goods and Service Tax (GST).
The unemployment rate was helped through government efforts to provide employment opportunities in rural areas, and fell from 9.5 % in August 2016 to 4.8% in February 2017.
Despite positive sentiment at the launch of new housing projects, there is still a backlog of unsold units in most of the major cities. Quarters to sales (QTS) estimates are used to test the health of unsold inventory. In 2018, the QTS improved slightly when compared to the previous year, from 14 quarters to 10 quarters, according to ICRA (link unavailable)
Weaker demand and price disparity will probably continue to hamper the market. Government is pushing to make housing more affordable with schemes which include incentives and developers are keen to provide more accessible homes in order to help the housing market make a strong recovery in the shortest possible timeframe.
Affordable homes now make up 20% of residential property sales, compared to 8% in the 2016 financial year. These homes are typically priced at an average Rs 2.5 million.
Since home prices are undergoing corrections as the market tries to right itself, it seems like home buyers could end up being winners.