Why now is a good time to buy a house

With big offers from builders and incentives from several state governments, the festival season in 2020 was perhaps the best time to buy a house. But many home buyers postponed the decision due to the pandemic. With Covid fears subsiding and economic prospects improving, real estate experts say end-users should not postpone their decision further. Here are some reasons why.Affordability has improvedAffordability depends on three factors: house price, income levels and home loan rates. “House prices have remained almost flat for the past five years, which helped improve housing affordability,” says Siva Krishnan, MD Residential Services, JLL India. “Affordability to buy a house has never been as good as it is now. By and large, property prices were stable during the past five years. Considering an annualised increment of 7-8%, affordability has gone up by that much,” says Keki Mistry, vice chairman & CEO, HDFC. medium nocaption87587048Improving job prospects after the pandemic scare have also boosted affordability. Job creation is on the rise and some sectors like IT are on a hiring spree. Most people, who faced pay cuts during the pandemic, have now seen restoration of their salaries. As a result, the ratio between house price and annual income has hit a multi-year low of 3.2 times. medium nocaption87587074Aiding this trend further is the fall in interest rates. “More than 90% of home buyers use housing loans. The decline in interest rates helps them take bigger loans, which increases affordability,” says Krishnan. For the first time in decades, the Mumbai market has become affordable. medium nocaption87587249Action already startedThe improvement in affordability and buyer sentiment is already reflecting in sales numbers. Total sales of residential units in July-September 2021 in eight major cities went up by 17% in the past three months and by 57% in the past one year. All cities except Kolkata reported significant growth in sales. medium nocaption87587288Registration of home sale documents, which includes the resale properties, also signals about this revival. “Improvement is visible everywhere and Mumbai recorded highest ever October registrations. This is higher than October 2020 and is achieved without the stamp duty sops available in last year,” says Gulam Zia, executive director, Knight Frank India.The sale documents registered in Mumbai in October 2021 hit 8,576, up by 8% compared to October 2020. The number of sale registrations in Mumbai had spiked in October 2020 due to the stamp duty incentives offered by the Maharashtra government last year. It was the highest number of registrations in October in the past eight years. So, the 8% growth this year is on a higher base. Homebuyers have not been deterred by the withdrawal of stamp duty benefits. medium nocaption87587332Rise in number of launchesWith demand on the upswing, builders have started launching new projects, though the 238% year-on-year increase in new launches is because of the low base effect. There were very few launches during the second quarter of 2020 due to Covid. However, there is a healthy 33% quarter-on-quarter increase as well. “The number of new launches increased in the July-September quarter and more are expected in the October-December quarter,” says Pankaj Kapoor, MD, Liases Foras. Though new launches have increased, they are yet to reach pre-Covid levels. “They are still 50% less than the pre-Covid level,” says Subhankar Mitra, MD, Advisory Services, Colliers India. medium nocaption87587359Decline in unsold unitsDespite the rise in new launches, the number of unsold homes fell marginally during the July-September period.In absolute terms, the inventory fall was only by 1% q-o-q and 4% y-o-y. But it was significant because there is an increase in the sales velocity. Also, the developers who were earlier launching luxury apartments have realised their mistake and focusing more on the mid and affordable housing segments. Since more buyers are interested in ready-to-move-in properties, the inventory reduction there is the highest. “Inventory of ready to move-in apartment has come down from 24 months to 17 months,” says Kapoor of Liases Foras. medium nocaption87587410Prices at an inflection pointDespite the surge in demand, housing prices remained relatively stable during July-September period. With the unsold inventory still high, builders may keep rates stable for some more time. However, experts say that this good period may not last long. Several hints to that effect are already visible. First, the offers (see box) and freebies from builders are not as generous as in previous years. This is largely due to the change in the financial situation of builders. “Last year, the situation was really desperate for builders. With many builders repaying their loans, they have become confident now,” says Mitra of Colliers India. medium nocaption87587519There are other reasons as well. GST, demonetisation and the pandemic have made strong players stronger in every sector, including real estate. “Around 30-40% of the active developers are out of the business now,” says Krishnan of JLL India. While small-time builders are struggling for funding, continued inflow from private equity funds to organised builders is helping them to improve their financials. According to a recent Anarock study, the PE funds inflow to Indian real estate has gone up by 27% in the first half of 2021-22, compared to the first half of 2020-21.boxcontent medium nocaption87589408How to evaluate the offers from buildersOffers from builders may come with a catch, so home buyers should evaluate offers thoroughly. First, see whether the offer is adding value to your home or reducing the overall costs. For example, offers like a free modular kitchen, household gadgets, free reserved parking space, free membership to clubhouse, etc add value because you have to pay for it anyway. Offers like price discounts, builders bearing statutory fees like stamp duty, registration charges, GST, etc reduce overall costs and therefore add value to you. “Offers of gold coins, travel vouchers, lucky draws, etc have nothing to do with the home. They do not add to its liveability quotient or future resale value,” says Anuj Puri, chairman, Anarock Group.Home buyers should be extra careful when buying under construction properties, and evaluate the track record of the builder and its ability to deliver on time. Another important thing is to make sure that the project is Rera registered.Improvements in sentimentsThe improvement in market sentiment is another reason why there aren’t too many attractive discounts this year. “The builders have realised that transactions are happening even without big offers,” says Gulam Zia of Knight Frank India. The present offers are broader and done with the intention of getting visibility to the project. “While other sops are reducing, buyers must understand that the builders maintaining price itself is a sop,” says Krishnan of JLL India.Jump in construction costsWhile it may be possible for builders to offer freebies in existing projects, it will be difficult for them to do so for new projects due to jump in construction costs. Prices of key commodities used in construction, such as cement and steel have seen a marked increase in the past 1-2 years.“Developers have their backs pushed to the wall by high spikes in input costs which show no signs of abating and are unlikely to relent unless the government intervenes,” says Anuj Puri, chairman, Anarock Group. “With the increase in commodity prices and jump in labour costs due to Covid disturbances, the room for developers to cut the price is almost zero,” says Krishnan of JLL India.Prices up in some pocketsIn addition to reduction in offers, some builders have started raising prices of some projects. However, this trend is yet become widespread. “As of now, the price increases are restricted to high-demand and low-supply projects by leading developers,” says Puri of Anarock Group. Does that mean that the prices will firm up further in 2022? While everyone agrees about the imminent price rise, experts are divided about that happening in 2022.“Some builders are increasing prices in pockets which signals that the prices have bottomed out. However, most builders may wait for a year before they raise prices because real estate market is just turning around and developers will try to maintain demand with stable pricing,” says Gulam Zia of Knight Frank India. Others agree with this view.“As on date, real estate is a buyers’ market and it will remain like that for one more year because builders have to keep the prices stable to make it affordable for end users,” says Kapoor of Liases Foras. However, Puri of Anarock Group thinks that there will be some price rise in 2022. “A 2-3% price increase is certainly a strong possibility in most markets during the course of 2022 and perhaps even higher, depending on developers, in specific projects and locations,” he says.Don't wait for rates to fallNot just house prices, it seems even the home loan rates have bottomed out. “Home loan rates have already been low and are unlikely to go down any further,” says Manish Shah, MD & CEO, Godrej Housing Finance. medium nocaption87587786There are several reasons behind this. First, global central bankers, including RBI, have started taking cognisance of rising inflation and therefore, don’t expect further rate cuts from them. Also, there is now swift transmission in rate changes. “Earlier, transmission of rates cut by RBI used to take time. But the same is happening smoothly now,” says Nandan of Savills India. In other words, there is no cushion left with banks to cut home loan rates any further.In fact, HDFC’s home loan rates for borrowers above Rs 75 lakh has inched up by a bit during the past one year. medium nocaption87588185This rate increase is only for people with less than 800 credit score because HDFC is offering special rate of 6.7% for people with credit score above that during this festival season. Will an increased competition bring down the margins of housing finance companies and bring the rates lower? This also may not happen; because the mortgage penetration is still very low in India. medium nocaption87587564“The housing loan penetration in India is very low compared to other countries and India’s demographic dividend is also favouring housing finance players. So, opportunity is big for all players and I don’t think any player needs to hit their own margin for growth,” Mistry of HDFC. Demographic dividend refers to the existence of large number of youngsters in our population, who are more comfortable to take loans.boxcontent medium nocaption87589345How to choose the best home loanHome loan borrowers need to consider the ‘effective cost’ of a housing loan. Home loan is a commitment of 15-20 years and therefore, borrowers should consider all costs and decide accordingly.“Banks may not tell all charges upfront. Since charges can come with different names like processing fee, legal and technical charges, stamp paper cost, GST, etc, ask them about the total costs involved with the loan,” says Aparna Ramachandra, founder & director, Rectifycredit.com. Banks also usually insists on insurance for the house, an additional cost you need to factor into the calculation. Some lenders offer to waive these charges, but make sure that the bank is not charging them indirectly.Since these charges vary from bank to bank, comparing them will be difficult. A better way is to deduct these charges from your home loan amount and recalculate the effective cost. For example, assume that you are taking Rs 50 lakh home loan with a repayment period of 20 years and total charges involvedare Rs 20,000. At 7% interest rate, the EMI will work out to Rs 38,765. Since you have to pay Rs 20,000 upfront, this is equal to taking a net loan of Rs 49.80 lakh. In other words, you are paying an EMI of Rs 38,765 for a net loan of Rs 49.80 lakh and its interest costs works out to be 7.05%, an additional cost of 5 bps. The comparison will become easy once you calculate this for all lenders.Untitled Carousel 72005975