By the half of decade, we are seeing, the real estate sector in India
specially Northern India is showing the rapidly growth. By the couple of years, the property price in Noida
, Gurgaon and Delhi NCR is touching the sky. Now the property buying has gone beyond the reach of middle class and lower middle class.
Now a good news for home seekers, the residential real estate sector is set to decelerate, according to a report by Nirmal Bang Institutional Equities.One of the main reasons is that the inventory level is expected to go up over the next one year because of declining sales amid increased launches of new projects.The consequent weakness in transaction volumes will exert pressure on developers in servicing their debt.
This could lead to a softening of prices as banks could force realtors to cut their inventory levels to repay the debt. Here are some excerpts from the report:
Residential demand likely to decelerate further because …
a) Sales volumes have come down: Transaction volumes in the first quarter of 2011-12 declined across cities on a sequential basis, while a few cities, such as Mumbai, Gurgaon, Hyderabad and Kolkata, reported negative growth year-on-year (YoY).
This was mainly due to the subdued project launches, the lowest since March 2010, on account of the delay in government approvals and low demand because of higher prices and interest rates on home loans.
b) Salary growth lags behind rise in property prices: The salaried class, which accounts for around 70% of the total residential demand, has witnessed a 10-13% CAGR in salary over 2009-11, according to industry experts such as Aon Hewitt and Mercer. However, property prices in cities like Mumbai and NCR, which account for more than 40% of residential demand, have gone up by 60-80% from their 2008-9 lows.Hence, transactions in these cities have been hurt the most over the past few quarters. Also, the rising inflationary pressure since the second half of 2010-11 has dented the purchasing power of buyers. Other cities, such as Chennai and Kolkata, have also seen a rise in property prices by 25-40% since 2008-9, but the prices in Bangalore have moved in line with the salary growth.
Inventory levels to go up further
According to industry sources, the residential inventory level is still 42-80% off its peak (2008).
Over the past few months, the inventory has been stable at around 9-15 months across cities despite the slowdown in transactions, as against its peak of 30-55 months in December 2008.
This is largely on account of subdued new launches in cities like Mumbai, Noida and Chennai. On the other hand, the inventory level has moved up slightly in Bangalore due to aggressive new launches. All this has resulted in prices remaining firm across cities despite the subdued demand.
Affordability has taken a hit
Affordability has taken a hit with the loan-to-value ratio falling from 90% to 80%, thereby increasing the down payment for buyers. The increase in interest rates by the RBI has also led to a rise in home loan rates. If the rates come down, it will give some respite to buyers, but residential demand will be driven more by affordable prices and salary growth.