Affordable housing hit badly in real estate slump
Amid economic slowdown, the drastic fall in home absorption rates this year is a matter of serious concern. The high property and home loan rates have taken the toll of sales, leading to large inventory build up.
According to industry statistics, absorption rates in the investor and speculator-led markets of Mumbai and Delhi and surrounding towns have dropped by whopping 58 percent and 57 percent respectively, while in largely end-user led market of Bengaluru, the fall is restricted to 16 percent.
This is certainly not a good news for debt-ridden and cash-strapped property developers who are already reeling under the impact of low sales.
High input costs coupled with high interest rates are having adverse impact on their net profits. Statistics show that revenues of top 25 realty companies declined 9.30 percent in Q4 FY12 and net profitability margins have plunged to 13.6 percent during last quarter.
Home sales have been dropping as property prices are rising faster than salaries. In the wake of low salary hikes but substantial rise in property prices, loan eligibility of prospective home buyers has suffered. Between Q4 2010-11 and Q4 2011-12, property prices increased by 33 percent in NCR, 17 percent in Mumbai and eight percent in Bengaluru.
Moreover, in view of rising inflation, home affordability has also taken a beating.
The Reserve Bank of India (RBI) has also sounded warning signals with regard to home loan slowdown in view of high property and loan rates and eligibility of home loan amount dropping to 80 percent of property price. According to RBI, share of housing loan in bank credit has hit eight-year low, dropping from a high of 12.9 percent in March 2006 to eight-nine percent in March 2011.
In this backdrop, the gap between demand and supply is widening. And since most of the demand is in the affordable housing, it is this segment which has been hit badly.
What is really worrying is that with consumer inflation hovering at 10.5 percent annually, there is no room for interest rates to come down. And also with no likelihood of any worthwhile price correction in the home prices, there may not be any significant pick-up in home sales. As such with low absorption, inventory hang up is expected to increase further.
The lack of mistrust between developers and property consumers on one hand and developers and policymakers and lenders on the other hand has also precipitated matters. The government is interested in giving fiscal incentives to housing industry but fears such incentives may not eventually benefit larger public.
It is heartening that the housing and urban poverty alleviation ministry is planning to come up with a comprehensive policy to give boost to affordable housing. The policy package may include increasing the floor space index (FSI) along with liberalising density norms, provision of interest subsidy to builders and speedy clearances to check cost escalation of property.
The government is also working on providing concessional project funding. However, the National Housing Bank will be tying up funding with the ratings of developers to discipline them.
The bank is also looking at providing loans at concessional rates to buyers of low cost homes. The scheme of one percent subvention in home loan rates for low-cost homes has already been extended for one year.
All these measures hold hope for the revival of the residential real estate, particularly affordable housing. But this high demand housing segment will get a real boost only if the developers live up to the expectations of consumers, policy makers and lenders in terms of transparency, commitment, timeliness, governance and risk mitigation.