Why Indian Real Estate Market will bottom out in 2021
Demand forecasting in real estate has always been a puzzle for economists. Economics suggests consumption products like iPhone, cars, mobile data, have a falling demand curve which means as price falls their consumption increases.
For investment products like equities, as prices fall, trading volumes normally come down indicating lowered demand. However, when it comes to Real Estate, demand forecasting becomes a complex exercise, some buy homes for consumption, some for investment and there are others who look at homes for investment-cum-consumption. Therefore, demand forecasting has always remained a puzzle. However, a broad-based analysis can definitely throw a good amount of light on the expected trend.
A 30 year period to analyse long term Trend.
Since 1990, there have been three bull runs and three slowdowns in the property market. Interestingly, all of these have been driven by big-ticket events.
In 1992, the government eased norms for the flow of NRI money into Indian Real Estate. This big decision led to the first bull-run in 1993 that lasted till the emerging market crisis of 1995. During ’93-95, many NRI’s had their first taste of buying a property in India. Mumbai was the biggest beneficiary of this bull-run.
The slowdown of late 90’s was reversed by the quantitative easement undertaken by the US Central bank in 2001 after the 9/11 crisis. Many other central banks followed easy money policies. The free-flowing money found its way into Indian real estate, largely through FDI in real estate. This triggered a historic real estate boom that lasted till the US housing crisis of 2008.
To fight the housing crisis, the US government propelled a massive liquidity push. With many countries following the big daddy, the global liquidity again found a way into Indian real estate through Real Estate funds, HFCs etc. So post-2009, we again saw a major upswing in realty prices coupled with huge volumes.
And then in 2016-17 came in the Triple Trauma for Real Estate developers (Demonetisation, GST and RERA). This led to a big slowdown in real estate markets across India.
Reducing gaps between incomes and EMIs
The lockdown has resulted in lower income for homebuyers. However, over the years, incomes have been increasing and property prices and interest rates have been moving southwards. As a result, we have a situation where the EMI-to-income ratio has come down from about 50 percent in 2014 to about 25 percent in 2020. And this is a very healthy indicator.
Steady demand and reducing supply
During the last three years, the high level of debt in a developer’s balance sheet had forced them to liquidate inventory to make their commitments to the lenders. As a result, we experienced falling market prices. With more money flowing into the system, this pressure will come down resulting in significantly lower stress levels and fewer discount deals.