The general elections in India have just been concluded to re-elect National Democratic Alliance (NDA) for the second term. In its first term, the Modi-led government had introduced certain crucial structural reforms for the real estate sector such as RERA, GST, IBC, Benami transactions, budgetary provisions, etc. Apart from these government interventions, empirical evidence suggests that real estate is also dependent on the political stability and macroeconomic factors. Hence, the big question still remains that whether the new government, the concept of ‘naya bharat’ and the existing economic climate will provide the needful impetus to residential real estate or not.
Home buying or residential investment is one of the most important financial decisions of a person’s life. The most important investment decision for any investor is to ‘buy right’. Hence, irrespective of the location, ticket size and income of the home buyer, they should be well aware about the macroeconomic factors at the time of the purchase.
Firstly, let’s have a look at the current macroeconomic conditions of India. Some of the macroeconomic factors pertinent for the real estate sector are –
- Interest rate – Real estate sector is an interest sensitive sector. With the inception of housing finance and tax benefits for loans, home buyers generally take home loans at the time of purchase, hence increasing the sensitivity of interest rate on real estate. Currently, the home loan rate in India stands to be anywhere between 8.55% -11%.
- Population growth – It is simple, more the number of people-more is the need for dwelling units. The population growth as per the data from World Bank was 1% in 2017.
- Employment – The employment rate drives the rental as well as the outright residential real estate market. Real estate and employment are highly co-related with each other. According to Trading Economics, the unemployment rate stands to be 3.53%.
- Per Capita Income – Income, especially disposable income is an important factor that determines the purchasing power of a homebuyer. Higher level of income results into higher savings and investments. For real estate to grow, it is important that the investment portion of the income grows. As per Central Statistics Office (CSO), the per capita income in 2018-19 stood at Rs 25 lakh.
As predicted by the economist and bondholders, RBI announced repo rate cut to 5.75% its Monetary Policy Committee (MPC) meet on 6th June 2019. This rate cut is expected to be transferred to the home buyers through housing loans by the housing finance companies. This, combined with almost constant property prices is expected to have a positive impact on the housing demand. In theory, real estate asset also grows when lower interest makes bonds less attractive. The factors like employment and per capita income for India have been taciturn.
Credit cycle and residential real estate cycle
In real estate life cycle, the asset is leveraged twice! Once during the process of construction i.e. project finance and afterwards by the home buyers for the purchase. With leverage playing an indispensable part in the real estate cycle, the credit cycle of the Indian economy cannot be ignored when it comes to real estate. Backed by various economic literature, credit plays an important role in providing liquidity and investment to real estate.
The co-movement of credit and housing pricing cycle has been re-confirmed by International Monetary Fund (IMF) in one of its publication. Hence, addressing the credit issues of the financial market should be one of the top priorities of the new Indian government. Simultaneously, banks should develop proper risk management and credit techniques to control the exposure of Non-Performing Accounts (NPA) as excessive credit growth is also a risky situation for the economy. Nowadays, banks are getting cautious regarding their exposure, kudos to the RBI and the internal credit risk controls!
A word of caution
As mentioned earlier, investing in residential real estate is all about ‘buying right’. The aphorism, ‘A rising tide lifts all boats’ may not apply to the context of real estate asset classes. Choose wisely which asset class is suitable as per the current economic factors. Look into the valuation, current yield, future infrastructure projects and local economy before investing or buying. When it comes to real estate, investors are expected to be patient! As according to an economist, when the housing market flourishes the expectations of people becomes too optimistic and when the market is undergoing a downturn these expectations turn too pessimistic.
The real estate market is expected to improve if the new government focuses on the improvement of the credit cycle, tight controls on bad loans and creation of jobs. Lastly, leadership is one of the most important factor to lead real estate development, which we expect our Honorable Prime Minister Narendra Modi is capable of!