Indian Real Estate Prices Drop

India’s National Housing Bank (NHB) reports that property prices across the country are falling when adjusted for inflation. The disparity between reported price gains and actual price gains …

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India’s National Housing Bank (NHB) reports that property prices across the country are falling when adjusted for inflation. The disparity between reported price gains and actual price gains is quite large, as evidenced by the difference in New Delhi home values. The reported increase was 17.01% in the second quarter of 2012, although with inflation factored in the increase was only 6.23%. While New Delhi and other locations including Chennai and Jaipur remained in positive territory after the adjustment, other cities like Mumbai recorded negative gain after the proper accounting. For more on this continue reading the following article from Global Property Guide.

Recently, Indian property price increases have slowed sharply. Of the 15 major Indian cities covered by the NHB Residex, nominal house prices rose in 9 cities and fell in 6 cities during the year to end-June 2012. However, when adjusted for inflation, house prices fell in more cities (11 cities) than rose (4 cities). 

During the year to end-Q2 2012, house prices in New Delhi rose by 17.01% – but this was the lowest annual price increase since Q4 2010, according to the National Housing Bank (NHB). When adjusted for inflation, house prices in Delhi increased by only 6.23%.

In Mumbai, house prices rose by 8.84% (-1.18% inflation-adjusted) y-o-y to Q2 2012.

Pune registered India’s highest annual house price increase of 33.33% (21.06% inflation-adjusted) during the year to end-June 2012. Chennai and Jaipur also recorded strong house price increases of 24.6% (13.12% inflation-adjusted) and 21.88% (10.65% inflation-adjusted), respectively.

In contrast, Kochi, in Kerala, had seen the biggest annual house price fall of 31.78% (-38.06% inflation-adjusted). It was followed by Bhopal (-7.59%), Hyderabad (-6.59%), Patna (-4.11%), Surat (-2.68%), and Faridabad (-1.36%). When adjusted for inflation, all of these cities registered double-digit house price falls.

Based on the NHB Residex, Chennai has the most expensive housing in India while Kochi had the cheapest (figures as of June 2012).

India Real Estate Prices

Property sales in Mumbai had fallen by 70% by late-2011, from their peak levels in 2007, according to Firstpost. In central Mumbai, unsold units accounted for more than 45% of total launched housing units by late-2011.  Similar drops in demand can be seen in other Indian cities.

DFL, India’s largest real estate developer, is projected to cut new project launches. Another property company, Unitech, said that it will halt new projects over the next few months.

The Indian economy has been slowing sharply. During the first quarter (April-June) of the fiscal year 2012-13, real GDP expanded by 5.5% from the same period last year, the decade’s worst Q1 performance. The economy is projected to grow just 4.9% in 2012, in contrast to an average growth rate of 8.3% from 2003 to 2010, according to the IMF.

Given this unusually uncertain economic outlook, India’s property market is expected to continue slowing in the coming months.

India’s great housing boom

Indian house prices rose rapidly from 2002 to 2007. Strong economic growth and urbanization supported house prices, while in city centres a housing bubble was encouraged by inadequate infrastructure, lack of planning and antiquated land use laws.

The price increases were accompanied by low interest rates. Home loan rates fell to a historically low rate of 7.5% in early 2004 until 2005.

From 2005 to 2007, the economy grew at 8.9% per annum, making it one of the world’s fastest growing, after 7.6% per annum growth from 2003 to 2004.

The liberalization of major sectors of the Indian economy during the early 1990s brought a rapid influx of foreign direct investment into the country. A boom in the ICT and BPO industry generated rapid employment growth, increasing the demand for housing and causing a ripple effect in the construction and telecommunications sectors.

Yet though house price increases were supported by these strong fundamentals, speculation also played a role. From 2000 to 2006, residential property became significantly less affordable. By 2002, a dwelling in Mumbai cost around 85 times the average annual average income. By 2006, residential properties in Mumbai cost 100 times the average annual income.

Developers’ capital rapidly grew as their stock prices increased, and they used it to bid high prices for huge plots of land, making it relatively easy to sell properties at very high prices.

Flashback to the global crisis

If there is a slowdown, it won’t be the first. During the world economic downturn in 2008, India’s developers cut prices and introduced lucrative deals such as subsidized furniture and internet connections.

Demand for luxury housing fell 50%, while affordable housing demand fell 10%, according to a May 2009 survey by the Associated Chambers of Commerce and Industry of India (Assocham). House prices in Delhi fell by as much as 13.08% during the year to H2 2009. Developers refocused on building low-income homes.

But India’s economy quickly rebounded, and house prices soon started rising again.

Interest rate hikes may continue

In September 2011, the RBI raised its policy lending rate by 25 basis points to 8.25%, the 12th interest rate hike since March 2010, when the RBI moved rates up from 4.75% to 5% to contain inflation.

The RBI’s prime lending rates are also heading up, having been dropped to 7.50% (low) and 8% (high) in July 2010, from 11% and 12% respectively. As of March 2011, prime lending rates are 8.25% (low) and 9.50% (high).

According to Finance Secretary RS Gujral, the government is now concentrating on fighting inflation and slowing growth. The RBI may hike rate again, as inflation remains high at 9.87%.

The increase in interest rates is already being felt in the construction sector, which grew by only 1.2% in Q2 2011, an 8.2% drop from the previous quarter. More construction gloom is expected to follow.

India’s small mortgage market

Despite reforms since 1991, India’s mortgage market is held back by problems:

  • Banks prefer to lend to middle and high-income sectors, leaving limited financing options for low-income individuals.
  • The government has a huge influence on major domestic banks, discouraging initiative.
  • There’s no proper legal framework for foreclosures
  • Titling problems are rampant.

As a result, the ratio of housing loans to GDP is very low; in 2010, housing loans were only 4.04% of India’s GDP. The leading mortgage lender is the Housing Development Finance Corporation (HDFC) followed by the State Bank of India (SBI).

In 2010, total housing loans rose by 8.66% to INR 3009.29 billion (US$ 61.21 billion) from INR 2769.57 billion (US$ 56.33 billion) a year earlier. Interest rates at major banks and financial institutions range from 10.75% to 12% for floating rate mortgages, and 13% to 14% for fixed-rate mortgages. The loan to value (LTV) of most Indian home loans is 85%.

Relatively low yields

Rental yields remain low in India, according to Global Property Guide research. Smaller apartments have higher yields.

  • Prices of smaller Mumbai apartments are around US$11,600 to US$14,000 per sq. m.; yields are poor, at 2.52% to 2.76%.
  • Delhi prices are cheaper at US$4,000 per sq. m., but yields are also low, at 1.71% to 2%.
  • Annual yields in Bangalore are relatively higher than in Delhi and Mumbai, ranging from 3.48% to 4.19%.

Residential rents from Q1 to Q2 2011, according to Colliers:

  • In selected Mumbai areas, rents rose 2% to 5%.
  • Bengaluru prime residential property rents increased by 3% to 7%.
  • Delhi prime residential property rents rose by 2% – 4%
  • Rents in Chennai rose by 2% to 5%, due to increasing demand and shortage of residential properties,

India’s rental market is hindered by problematic socialist laws protecting tenants. The laws are generally poorly conceived and ineffective, making implementation difficult. Although these are gradually being replaced by more market-oriented laws, the rental market’s full potential is yet to be realized.

Cities with rent controls generate lower yields. Mumbai rents in houses with sitting tenants are frozen at their 1947 levels, due to the Maharashtra Rent Act of 1999, an extension of the Bombay Rent Control Act of 1947. Delhi also has rent controls.

Outlook is unusually uncertain, says IMF

From 2003 to 2010, the Indian economy grew by an average of 8.3% per year, according to the International Monetary Fund (IMF). In 2011, the country’s real GDP growth slowed to 7.2%.

The Indian economy continues to slow in 2012, owing to low external demand, slow new project approvals, corruption scandals, sluggish reforms and policy uncertainties.

During the first quarter (April-June) of the fiscal year 2012-13, real GDP expanded by 5.5% y-o-y, the decade’s worst Q1 performance, due to flatlining manufacturing, mining and quarrying sectors.

The IMF revised its GDP growth forecast for the country this year to 4.9% from 6.1%. Likewise, the World Bank has also cut its India growth forecast to 6% in 2012 from an earlier forecast of 6.9%. On the other hand, the Reserve Bank of India (RBI), the country’s central bank, expects the economy to grow by 6.5% this fiscal year.

Exports fell 9.7% y-o-y in August 2012, and imports fell 5.08% to INR2 trillion (US$38 billion), resulting in a wider trade deficit of INR831.3 billion (US$15.7 billion).  The country’s current account deficit stood at 3.9% of GDP during the quarter ending June 2012.

In 2011, the country’s overall fiscal deficit was 9% of GDP. The gap may widen to 9.5% of GDP in 2012, the third highest in the world, according to the IMF. The fiscal deficit is projected to fall slightly to 9.1% of GDP in 2013.

Inflation is another worrying issue. Consumer price increases were projected to remain at about 7.7% in September 2012, according to Bloomberg. From 2006 to 2011, average inflation was 8.7%, in sharp contrast with an average inflation rate of just 3.9% per year from 2000 to 2005.

“The outlook for India is unusually uncertain, monetary policy should stay on hold until a sustained decrease in inflation materializes,” said the IMF.

Economic policy revamp

The government has recently broken the political gridlock, opening the economy to more investment from abroad, in the most extensive policy changes since Prime Minister Manmohan Singh was reelected in 2009.

The economic policy revamp includes the following:

  • Foreign companies are allowed to take a 51% stake in multi-brand retail stores
  • The cap on foreign stakes in broadcasting agencies has been raised from 49% to 75%
  • Foreign investors are allowed to 49% of national airline carriers.

In addition, subsidized diesel prices have been raised by almost 14%, the first increase in 14 months, to tackle the country’s budget deficit. This measure is expected to help narrow the deficit to 5.1% of GDP this fiscal year ending in March 2013 from 5.8% of GDP a year earlier.

This article was republished with permission from Global Property Guide.

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