COVID-19 pandemic adds pain to India’s already weak housing market
Lalaine C. Delmendo | September 30, 2020
India’s housing market has ground to a halt. Home sales, residential construction have declined steeply, as the economy has suffered its worst decline on record due to the coronavirus pandemic, and except for Hyderabad and Ahmedabad, real house prices have been falling in major cities.
During the year to Q2 2020, according to PropTiger:
- Hyderabad witnessed the highest y-o-y price increase at 7% (1.7% in real terms), to an average of INR 5,505 (US$75) per sq. m.
- In Ahmedabad, prices rose by 6% y-o-y to an average of INR 3,104 (US$42) per sq. m. (up 0.8% in real terms)
- In Kolkata, prices rose by 3% y-o-y to INR 4,178 (US$57) per sq. m. (down 2.1% in real terms)
- In Bangalore, prices rose by 3% y-o-y to INR 5,299 (US$72) per sq. m. (down 2.1% in real terms)
- In Pune, prices rose by 2% y-o-y to INR 4,951 (US$68) per sq. m. (down 3% in real terms)
- In Mumbai Metropolitan Region (MMR), the average house price rose by 1% y-o-y to INR 9,490 (US$130) per sq. m. (down 4% in real terms)
- In Delhi NCR, prices increased 1% y-o-y to INR 4,293 (US$59) per sq. m. (down 4% in real terms)
- In Chennai, prices were steady at an average of INR 5,138 (US$70) per sq. m. (down 4.9% in real terms)
The All-India house price index rose by 3.92% y-o-y during Q1 2020, slightly up from the prior year’s 3.64% growth, according to the Reserve Bank of India (RBI), the country’s central bank. However when adjusted for inflation, nationwide house prices actually dropped 1.21%. On a quarterly basis, house prices fell by 0.25% (-0.96% inflation-adjusted).
Residential construction activity is falling. In Q2 2020, only 12,564 housing units were launched, down by a huge 80.7% from a year earlier, according to PropTiger. Total launches in H1 2020 were down almost 65% from the same period last year.
Demand is depressed. In Q2 2020, home sales in India’s 8 major markets (including Ahmedabad, Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata, MMR, and Pune) plunged by a whopping 79% to 19,038 units compared to 92,764 units sold in Q2 2019, according to PropTiger. For the first half of this year, sales dropped 52% from a year earlier.
“The current pandemic is an unprecedented black swan event that is expected to contract growth in the global economy, including that of India,” said Mani Rangarajan of PropTiger.com. “Our recent Housing.com-NAREDCO buyer survey indicated that buyers have pushed back their purchasing decision by up to a year.”
India’s economy shrank by 23.9% in Q2 2020 from a year earlier, in sharp contrast to y-o-y growth of 3.1% in Q1 2020 and the biggest contraction on record, after lockdown was imposed in late March and extended several times. Fitch Ratings expects GDP to contract by 10.5% in FY21, double the 5% fall it forecast in June.
Buying property in India: a foreign national resident in India does not require approval of the RBI to purchase immovable property in India. Once he is a resident in India, he gets rights like any other resident. This freedom is however not available to citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan. However, a foreign national of non-Indian origin resident outside India cannot buy any immovable property in India. It is illegal for foreign nationals to own property in India unless they satisfy the residency requirement of 183 days in a financial year (a tourist visa lasts for 180 days). It is also illegal to buy property on a tourist visa.
Moreover property cannot be purchased jointly in the name of one eligible person with one non-eligible person. That means a non-resident Indian (NRI) or foreign national of Indian origin (PIO) cannot buy a property jointly with a foreigner.
Homes sales are plummeting
In Q2 2020, home sales in India’s 8 major markets plunged by 79% to 19,038 units compared to 92,764 units sold in Q2 2019, according to PropTiger. For the first half of this year, sales dropped 52% from a year earlier.
All of India’s 8 major cities saw plunging sales during the year to Q2 2020.
- In Ahmedabad, sales of residential properties dropped by over 80% y-o-y to only 1,200 units
- In Bangalore, sales registered a decline of 73% y-o-y to 2,776 units
- In Chennai, sales fell by 70% y-o-y to 1,312 units
- In Hyderabad, sales dropped 86% y-o-y to just 1,100 units
- In Kolkata, sales dropped 75% y-o-y to over 1,000 units
- In Mumbai, sales plunged 85% y-o-y to just 4,560 units
- In Delhi NCR, total sales fell by a huge 81% to only 1,886 units
- In Pune, sales plummeted by 74% y-o-y to only 4,900 units
Mumbai and Pune are India’s two biggest markets, accounting for half of total sales in the country’s top 8 cities in Q2 2020.
Residential construction activity is falling sharply
In the second quarter of 2020, only 12,564 housing units were launched, down by a huge 80.7% from a year earlier, according to PropTiger. Total launches in H1 2020 were down almost 65% from the same period last year.
New launches fell in all of India’s major cities in Q2 2020:
- Kolkata suffered the most, with the number of launches plunging by 93.6% to just 183 units in Q2 2020 from 2,867 units in Q2 2019
- In Pune, launches fell by a whopping 92% y-o-y to just 1,250 units in Q2 2020
- In Mumbai, launches plummeted 91% y-o-y to 1,822 units in Q2 2020
- In Delhi NCR, new launches dropped 75% y-o-y in Q2 2020 to just 2,000 units.
- In Chennai, launches plummeted 75% y-o-y to less than 1,000 units
- In Hyderabad, launches fell by 61% y-o-y to only 2,050 units in Q2 2020
- In Bangalore, launches dropped 52% y-o-y to 3,270 units in Q2 2020
- In Ahmedabad, the number of launches plunged 43.5% y-o-y to just 1,340 units in Q2 2020 from 2,370 units in Q2 2019
Overall inventory overhang stood at 35 months in Q2 2020, up from 28 months the previous year. This means that with the recent level of sales, it will take about 3 years to absorb the current inventory.
However the total unsold inventory stock in India’s top 8 cities fell by 13% to 738,335 units in Q2 2020 from a year earlier, according to PropTiger.
Nevertheless “Mumbai and Pune continue to hold the maximum share of unsold stock (56 percent) followed by NCR and Bengaluru with 15 percent and 10 percent share, respectively.”
Low rental yields
Rental yields in India are low, according to Global Property Guide research.
- In South Mumbai, average yields range from 2.4% to 2.5% gross.
- New Delhi rental yields remain very poor, at between 2.9% and 3.2%.
- Bangalore has higher yields, ranging from 3.3% to 4.0%, but these are still much lower than yields seen in 2007, which ranged from 7.2% to 10%.
Yields data from real estate company Magic Bricks paint the same picture:
AVERAGE RENTAL YIELDS (%)
|City||Average Rental Yields (%)|
|Source: Magic Bricks|
Unsurprisingly, smaller properties offer higher yields. “Yields in the affordable homes segment are higher compared to the mid-level or luxury segment,” said Magic Bricks.
“There is also a significant variation between yields based on their capital values(Rs/sqft). We have observed across cities that properties priced below Rs 6,000/sqft have an average rental yield of more than 3%.”
Ambit Capital notes that if the Indian real estate market was correctly priced, the rental yield should tend to be somewhere close to the cost of borrowing. Instead, Mumbai (e.g.) has a rental yield of around 2% to 3%, while the lending rate is around 6% to 10%.
Falling interest rates
In August 2020, Housing Development Finance Corporation (HDFC), India’s largest mortgage company, lowered its interest rates by another 10 basis points for both new and existing home loans, following a 20-basis point rate cut in the previous month. The new interest rates now range from 7% to 7.55%. Almost all leading banks in India have reduced their home loan rates several times in recent months. For instance, State Bank of India (SBI), the country’s largest lender, has started offering home loans at 6.95% interest rate beginning July 1, 2020, about 150 basis points less than six months ago.
The rate reductions come after the Reserve Bank of India (RBI), the country’s central bank, slashed its policy interest rate seven times since January 2019 by an accumulated 250 basis points to a record low of 4% in May 2020 where it has stayed since. The latest rate cuts are expected to cushion the impact of COVID-19 pandemic on India’s already slowing economy.
Currently, interest rates for home loans in India range from 6.7% to 8.9%.
Effective October 1, 2019, the RBI has directed all commercial banks (except regional rural banks), local area banks and small finance banks to link their interest rates on all retail loans, including home loans, to an external benchmark. Since all floating-rate loans are linked to RBI’s repo rate, most banks have opted to use it as the external benchmark. Interest rates linked to the repo rate is called repo rate linked lending rate (RLLR), i.e the repo rate plus the bank’s spread.
HOME LOAN INTEREST RATES FOR SELECTED BANKS, SEPTEMBER 2020
|Banks||RLLR (%)||Interest rates (%)||Processing fee|
|Union Bank of India||6.80||6.70 - 7.15||0.50% (max INR15,000)|
|Bank of India||6.85||6.85 - 7.15||0.25% (INR1,500-INR20,000)|
|Central Bank of India||6.85||6.85 - 7.30||0.50% (max INR20,000)|
|Canara Bank||6.90||6.90 - 8.90||0.50% (max INR10,000)|
|Punjab & Sind Bank||6.90||6.90 - 7.25||Full waiver of fees|
|ICICI Bank||6.95||6.95 - 7.95||0.50% plus taxes|
|SBI Term Loan||6.65||6.95 - 7.45||0.40% plus GST (INR10,000-INR30,000)|
|Bank of Baroda||7.00||7.00 - 8.35||0.25%-0.50% (INR8,500-INR25,000)|
|IDFC First Bank||7.00||7.00 - 8.00||Up to INR10,000|
|Bank of Maharashtra||7.05||7.05 - 8.35||0.25% (max INR25,000)|
Tax break extension will boost demand
In June 2019, the tax breaks on interest paid on affordable housing loans increased by INR150,000 (US$2,040) to INR350,000 (US$4,760) per annum. The increased tax breaks are applicable to first time homebuyers whose purchasing a house valued up to INR 4.5 million (US$61,206).
“As expected, Budget 2020 has extended deduction available under Section 80EEA to the next financial year,” said Naveen Kukreja, CEO of Paisabazaar.com. “This will provide much-needed boost to the housing industry and achieve the government’s policy aim of ‘Housing for All by 2022’.”
Subsidies under the Credit Linked Subsidy Scheme (CLSS) first-time homebuyers will get the additional deduction of INR 150,000 (US$2,040) on top of the existing deduction of INR 200,000 (US$2,720).
The CLSS, introduced in 2016 focuses on helping middle income groups, economically weaker sections, and lower income groups in the country by bringing down their housing loans’ monthly installments. It is implemented by the Housing Urban Development Corporation (HUDC) and the National Housing Bank (NHB).
The following table shows the very significant effect of tax incentives and the CLSS on effective interest rates on mortgages:
|Loan amount (INR) Less: Subsidy under CLSS||2,700,000 230,156||2,700,000 -||2,700,000 -|
|Revised loan amount||2,469,844||2,700,000||2,700,000|
|Nominal interest rate||7.50%||10.75%||13.25%|
|Max deduction for interest allowed Deduction on principal||200,000 150,000||150,000 20,000||75,000 20,000|
|Tenure (years) Total amount paid per year Interest component Principal repaid Tax amount saved Effective interest paid on home loan||20 335,238 185,238 150,000 108,150 77,088||20 321,636 290,250 31,386 53,550 236,700||20 376,812 357,750 19,062 32,775 324,975|
|Effective interest on home loan||2.9%||8.8%||12.0%|
|Source: Housing Development Finance Corporation (HDFC)|
India’s mortgage market is growing very rapidly
Total housing loans in India amount to slightly less than 10% of GDP, low compared to, for instance, China at 20% of GDP, the UK at 88% of GDP, or the US at 81% of GDP. Nevertheless, the combined property portfolios of banks and specialized housing finance companies have risen by 20% annually over the last decade. Banks increased their retail home loan portfolio by 19% last financial year while Housing Finance Companies (HFCs) grew by 9%.
And despite the pandemic, housing loans grew 13% in May 2020 from a year earlier, based on report published by PropTiger.
In recent years, the government has taken several steps to boost the mortgage market.
- The Reserve Bank of India (RBI) has relaxed the minimum holding period for which the asset needs to stay on the financial institution’s book before it is eligible for securitization.
- The RBI has also eased liquidity thru open market operations, increased the single-borrower limit for exposure of banks to NBFCs, and reduced the minimum average maturity requirement for external commercial borrowings in the infrastructure space from 5 years to 3 years.
- The National Housing Bank has increased the refinance limits that eligible HFCs can access to tide over temporary mismatches.
Acute shortage of affordable housing
Around 80% of dwellings in rural areas do not have basic amenities, such as safe drinking water, toilets, or a bathroom. Millions of dwellings are made of mud, straw or bamboo.
The worst housing shortage is concentrated in Uttar Pradesh, Maharashtra, Bihar, Andhra Pradesh, Tamil Nadu, and West Bengal. According to the Economic Times Housing Finance Summit, there are just about 3 houses built per thousand population per year as against to the required construction rate of 5 houses per thousand population.
Currently, the housing shortage in urban areas is estimated at about 10 million units. And in fact, an additional 25 million affordable housing units are needed by 2030 to address the country’s growing urban population.
In 2015, the Prime Minister Awas Yojana’s ‘Housing for All’ project was launched in an effort to address the housing shortage amongst low-income households in cities by building 20 million houses by 2022. A rural component to the program was later added, which aims at building and/or upgrading 10 millions houses this year.
As of July 2019, about 8.36 million houses have already been sanctioned under the government’s program. The construction of about a third of which have been completed.
RERA regulations temporarily relaxed
The Real Estate Regulatory Act (RERA), giving rise to India’s first real estate regulator, was finally implemented on May 1, 2016, nine long years after its conception.
The act requires each state to have its regulator protecting buyers’ interests and maintaining speedy dispute resolution. All real estate projects should be registered with RERA, including alterations made and revenues collected.
Developers are now required to pre-approve their advertisements, including pre-launch ads. Developers should also inform buyers of their other ongoing projects. If the developer defaults on its delivery date, it will have to return the money invested by the buyers, with interest. If the buyers opt not to take the money, they will be paid monthly interest for every month of delay. Errant builders can be slapped with a fine of up to 10% of the total project cost or up to 3 years imprisonment. Developers as a resulted have shifted their focus to project execution, rather than new launches.
Because of the pandemic, the government has temporarily relaxed some real estate regulations and allowed time extensions to developers to complete a project. In addition, authorities have recently started to address complaints through on-line hearing of cases.
Enemy Property (Amendment and Validation) Bill
Against the backdrop of Prime Minister Narendra Modi’s disturbingly nationalist-toned government, the Indian Parliament recently passed the Enemy Property Bill, amending a 5-decade old law.
In 1968, after the Indo-Pakistan War of 1965, the Enemy Property Act was enacted to administer "properties belonging to, held or managed on behalf of an enemy, an enemy subject or an enemy firm".
Under the amendment bill, successors of those who migrated to Pakistan and China during partition will no longer have any claim over properties left behind in India. To date, around 9,500 enemy properties have been identified.
Below are some of the bill’s important provisions:
- The Custodian of Enemy Property is made the owner of enemy property retrospectively from 1968
- All legal sales undertaken by ‘enemies’ of enemy properties since 1968 are void
- Indian citizens who are legal heirs of enemies are prohibited from inheriting enemy property
- Civil courts and other authorities are prohibited from hearing certain disputes relating to enemy property
Indian economy contracts sharply
India’s economy shrank by a whopping 23.9% in Q2 2020 from a year earlier, the biggest contraction on record, after the country imposed nationwide lockdown in late March and extended it several times. Over the same period:
- Gross fixed capital formation declined by 47.1%
- Private spending plunged 26.7%
- Inventories dropped 20.8%
- Exports fell 19.8% while imports dropped 40.4%
- In contrast, government spending rose by 16.4% due to the introduction of relief measures to cushion the impact of the pandemic
Following the worse-than-expected Q2 figures, various agencies revised down their full-year forecast for the Indian economy. Fitch Ratings, for instance, now expects India’s GDP to contract by 10.5% in FY21, more than double the 5% fall it had forecast in June.
In May 2020, Prime Minister Narendra Modi unveiled a INR 20 lakh crore (US$271.7 billion) ‘Atmanirbhar Bharat’ stimulus package aimed at spurring economic growth and building a self-reliant India.
“The COVID-19 pandemic has brought an opportunity for India to be self-reliant for which we have announced a Rs 20 lakh crore package which is 10% of India’s GDP,” said PM Modi.
Yet India’s GDP growth was slowing even before the pandemic. The economy expanded by 4.2% in 2019, the lowest growth since the 2008 global financial crisis, according to the IMF.
The Indian economy grew by an annual average of 7.1% from 2009 to 2019, though there were claims that India’s actual GDP growth was considerably lower than shown by official figures.
India’s unemployment rate stood at 8.4% in August 2020, up from the previous month’s 7.4% but significantly down from a peak of 23.5% in April and May 2020, based on figures from the Centre for Monitoring Indian Economy (CMIE). Urban unemployment increased to 9.83% in August 2020 while rural unemployment rose to 7.65%.
The number of unemployed people in India increased to 36 million in August 2020, up from 32 million a month ago.
In May 2019, Narendra Modi won a dramatic second landslide election, returning him for another five-year term as India’s prime minister, giving a convincing mandate to his Hindu nationalist Bharatiya Janata Party (BJP).
- World Economic Outlook Databases (International Monetary Fund): https://www.imf.org/en/Publications/SPROLLS/world-economic-outlook-databases#sort=%40imfdate%20descending
- Home Sales Dip By 79% In June Quarter, New Supply Falls By 81%: PropTiger Report (PropTiger): https://www.proptiger.com/guide/post/housing-sales-drop-26-in-q4-amid-corona-scare-proptiger
- Weekly Statistical Supplement (Reserve Bank of India): https://www.rbi.org.in/scripts/WSSView.aspx?Id=23992
- Enemy property: what it is, how the new law changes its status (The Indian Express): https://indianexpress.com/article/explained/enemy-property-what-it-is-how-the-new-law-changes-its-status-4572372/
- India needs additional 25 million affordable houses by 2030: Report (The Economic Times): https://realty.economictimes.indiatimes.com/news/residential/india-needs-additional-25-million-affordable-houses-by-2030-report/70450083
- India needs over Rs 100 lakh crore to fulfil shortage of houses by 2022, says RBI (Financial Express): https://www.financialexpress.com/economy/india-needs-over-rs-100-lakh-crore-to-fulfil-shortage-of-houses-by-2022-says-rbi/1701014/
- Timeline to avail loan for affordable housing extended till March 31, 2021 (The Economic Times): https://economictimes.indiatimes.com/wealth/tax/tax-benefit-on-housing-loan-interest-upto-rs-3-5-lakh-extended-till-march-31-2021/articleshow/73836627.cms?from=mdr
- From hot cake to hot potato: The remoulding of mortgage lending (The Economic Times): https://economictimes.indiatimes.com/industry/banking/finance/from-hot-cake-to-hot-potato-mortgage-lenders-stare-at-a-serious-crisis/articleshow/71714068.cms?from=mdr
- Top 10 banks´ home loan interest rates (The Economic Times): https://economictimes.indiatimes.com/wealth/borrow/top-10-banks-home-loan-interest-rates/articleshow/72122701.cms?from=mdr
- HDFC Bank cuts MCLR by 10bps across all tenors (The Economic Times): https://m.economictimes.com/wealth/personal-finance-news/hdfc-bank-cuts-mclr-by-10-bps-across-all-tenors/articleshow/77407009.cms
- India´s residential property yields still low (Global Property Guide): https://www.globalpropertyguide.com/Asia/India/Rental-Yields
- Indian Residential Market Index & Overview (Magic Bricks): http://property.magicbricks.com/microsite/buy/propindex/index.html
- What kind of residential real estate can get you higher rental return on investment? Find out (Magic Bricks): https://content.magicbricks.com/property-news/what-kind-of-residential-real-estate-can-get-you-higher-rental-return-on-investment-find-out/105895.html
- GDP contracts by record 23.9% in Q1 against 3.1% growth in previous quarter (The Times of India): https://timesofindia.indiatimes.com/business/india-business/gdp-growth-contracts-by-23-9-in-q1-against-3-1-growth-in-previous-quarter/articleshow/77852090.cms
- PM Narendra Modi announces Rs 20 lakh crore economic package (The Economic Times): https://bfsi.economictimes.indiatimes.com/news/industry/pm-narendra-modi-announces-rs-20-lac-crore-economic-package/75699302#:~:text=Industry-,PM%20Narendra%20Modi%20announces%20Rs%2020%20lakh%20crore%20economic%20package,a%20truly%20self%2Dreliant%20country.
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