Home buying sentiment to weaken but new supply is kicking in say analysts

Analysts predict that real estate demand will drop down this year after a year of record-breaking sales in 2022. Despite the halt in interest rate increases this April, home loans have become more expensive in the past six months, which will begin to affect demand.

Due to the scale of home loans, where a single basis point increase in interest rates can set buyers back by a few lakhs, interest rates have a direct association to housing demand.

The Indian central bank raised interest rates six times, for a total increase of 250 basis points, since May of last year. The most recent monetary policy committee meeting's minutes show that the cycle of rate tightening is still ongoing.

Real estate developers have been starting new projects in the interim, encouraged by the pandemic-induced demand and declining inventory.

While the US/European recession and the IT slowdown are likely to have a negative influence on demand in the near future, the supply glut has not abated, according to analysts at Nuvama Institutional Equities.

According to a survey by CII-Anarock, the top 7 cities saw new launches totaling over 1.09 lakh units in Q1 2023 compared to 89,100 units in Q1 2022 and 92,900 units in Q4 2022. This is an increase of 18% from the previous quarter and 23% on an annual basis.

According to the research, the top seven cities are the National Capital Region, Mumbai Metropolitan Area, Bangalore, Chennai, Pune, Hyderabad, and Kolkata.

Impact on affordable housing

House loan rates have increased by about 9% as a result of interest rate hikes up to this point, and further increases may cause Indians to reconsider purchasing a home. Borrowers have run out of choices to extend the maturity of their loans while maintaining the same EMIs as a result of the continuous rate increases.

Yet, up to this point, banks and NBFCs have maintained the demand by providing discounted spreads on the benchmark rate. According to a report by HDFC Securities, the rate overhang may last for a few more quarters and is not expected to cease anytime soon.

According to analysts, the affordable segment is currently experiencing the most of the rate hike's effects, which could last for a few more quarters while the demand for luxury goods is still strong.

"Up to this time, the sector's core secular housing demand has not been impacted by the 250 basis point rate increase following the Covid ruling. The affordable section is beginning to show symptoms of weakening, though. This is in line with expectations because the loan eligibility for this group makes it the most vulnerable to rate changes, according to a report by HDFC Securities.

The term "affordable housing" refers to dwelling units having a square footage of 600 square feet or less that are accessible to those in society whose income is below the median household income.

The mid-segment homes priced between 40 lakh and 80 lakh rupees continue to dominate new supply, according to the CII-Anarock survey, holding a 36% share. Following this are the premium (between 80 lakh and 1.5 crore) with a 24% share and the cheap (under 40 lakh) with an 18% share.

Analysts predict that demand predictions for the premium or luxury market may not change, although that segment only consumes a third of the newly additional supply.

Sentiment suffers too

Homebuyer mood is being impacted by frequent layoffs at both major and small corporations, in addition to the impact of rising real estate prices as a result of input cost increases.

According to statistics from Layoffs.fyi, 16 firms lost all of its employees in 2023 due to a liquidity crisis, and three of these startups — WeTrade, Fipola, and DUX Education — were based in India.

Recent layoffs by both major and small corporations are probably going to affect demand in the next two quarters, which will slow the growth of the housing market. According to Anuj Puri, head of Anarock group, "many homebuyers afflicted by layoffs may postpone home purchases until their work situation stabilises."

Desire for expensive homes is still strong.

According to the CII Anarock research, "The Housing Market Boom," the two real estate hotspots NCR and MMR have experienced particularly significant momentum in the selling of expensive, larger properties over the last three quarters.

The paper highlights poll results that show 96% of respondents agree that increased home loan rates will have an impact on housing demand.

The NCR market, which experienced the greatest price appreciation this year, was driven by demand for luxury homes, according to a report by HDFC Securities. "Demand in the luxury category has remained robust and has been the driving reason for greater price realisation," the report stated.

According to Anarock statistics, the average property price across the top 7 cities rose between 6 and 9% in the first quarter of 2023 compared to the first quarter of 2022, primarily as a result of rising demand and the cost of construction-related raw materials.