Is this a good time to buy that house?

Even before Covid-19 arrived in India, the real estate sector was in a bad shape. Residential prices had either remained flat or moved up very tardily in 2019. The sector was trying hard to recover from the demonetisation in 2016, followed by the introduction of the Real Estate Regulatory Authority Act (RERA) and the rolling out of the GST. Little surprise that real estate developers were sitting on a huge pile of unsold units. In some markets such as Delhi NCR, it will take almost three years to clear the inventory. Builders are saddled with unsold flatsIn the top eight cities alone, almost 4.5 lakh units were lying unsold at the beginning of the year.Mumbai MMR 76356778Delhi NCR 76356786Bengaluru 76356790Pune 76356795Kolkata 76356805Chennai 76356814Ahmedabad 76356818Hyderabad 76356822Sources: Unsold unit data from Knight Frank as on 31 Dec 2019; micromarket prices data from Magicbricks as on 8 Jun 2020At the same time, affordability had improved in 2019, with the average annual income required to buy a 1,000 sq ft house coming down in most cities across the country. According to real estate consultancy Knight Frank India, the benchmark requirement is 4.5 years of annual income. In December 2019, buyers in five of the eight cities required less than that to buy a house.Affordability improved significantly in 20195 of the 8 cities are below the Knight Frank Affordability benchmark of 4.5 76356828 Figures denote the ratio of average house price to average annual household income in each city.... but consumer sentiment got hit by CovidBoth the current and future expectations indices are in pessimistic zone. 76356856Source: RBI Consumer Confidence SurveyThe situation has changed dramatically after Covid. The widespread job losses and pay cuts due to the closure of business activity during the lockdown pulled down consumer confidence and mauled the industry sentiment. The latest survey by RBI shows that consumer confidence collapsed in May. The Current Situation Index touched a historic low and the forward-looking Future Expectations Index also recorded a sharp fall. The two indices are based on the perceptions of 5,400 households across 13 cities on economic situation, employment, price level, income and spending. Both indices are now in the pessimism zone.Property prices fell after Covid 76356906Home buying plans are on holdStill plan to buy: 67%Plan on hold: 24%Plans dropped: 9%Buyers have also cut budgetsRetain or increase budget: 73%Reduce budget: 27%Wealth erosion adds to woesFinancial planners are advising clients to conserve money and not spend money on even small purchases, leave alone get into high-value multi-year financial commitments like buying a house. Adding to the pessimism of buyers is the severe wealth erosion due to the stock market crash in March. Though real estate and stocks are distinctly different asset classes, the losses incurred tend to make individuals more averse to spending and impairs their willingness to take risks.The pessimism has also spread to the industry. The Knight Frank FICCI Naredco Real Estate Sentiment Index, which captures the perceptions and expectations of industry leaders, has also taken a beating and fallen into the pessimistic territory. “Given these turbulent times, it is not surprising that our survey has recorded its lowest ever sentiment score in January-March 2020,” Knight Frank India Chairman and Managing Director Shishir Baijal wrote in the report.Industry has also turned pessimisticStakeholder sentiment has dipped sharply in recent months. 76356929Source: Knight Frank-FICCI-NAREDCO Sentiment IndexThe report reflects what is happening on the ground. As demand declined precipitously during the lockdown, real estate prices also came down across the country. But they could fall even more in the coming months. In an online conference organised by Naredco earlier this month, Union Railways and Commerce Minister Piyush Goyal reportedly asked builders to cut prices and clear unsold units. “Unless you reduce your rates, you are stuck with your material. The market is not improving in a hurry. Things are seriously stressed and your best bet is to sell,” Goyal told the builders.At another online event organised by Naredco and Credai in April, HDFC Chairman Deepak Parekh said real estate prices could correct by as much as 20%. “Real estate prices have to come down. I believe NAREDCO’s estimate is 10-15%. I feel one must be prepared for even 20%,” Parekh had said.Such estimates have caused the expectations of buyers to soar. A Magicbricks survey conducted last month shows that 31% expect a discount of more than 25% while 27% expect prices to fall by 20-25%.What buyers want in a post-Covid marketPrice cuts and easy terms are the top things that buyers are looking for.-Builders must cut prices-Relax terms for downpayments-Do woodwork and fittings to minimise post-purchase costs-Facilitate videos and photographs to avoid visits-Online paperwork and documentation-Online registry without going to courtsHow much discounts do buyers wantMore than 25% off: 31%20-25% off: 27%15-20% off: 9%10-15% off: 10%Less than 10% off: 2%Indifferent to discounts: 2%Want other benefits: 13%Source: Magicbricks surveyWill prices fall further?However, experts don’t share the optimism of buyers and caution them from reading too much into Goyal’s statement. “It is important to understand that the comment was contextual and cannot be treated as hard-lined guidance on price cuts. The debt-equity ratio imbalance for some developers is not new and the advice is directed towards overleveraged developers to not seek further debt but instead rationalise prices to expedite sales,” says Anurag Mathur, CEO of real estate consultancy Savills India. 76356958Steep price cuts could lead to trust issues, with customers doubting the stability of the market and investment potential of the asset- Anurag Mathur, CEO, Savills IndiaBut he agrees that conversations around price cuts tend to drive down sentiments and could potentially impact buying decisions of certain segments of buyers. “I don’t think need-based homebuyers should hold back as prices have been stable in India for the past 5-7 years, which in an inflationary economy signifies a price correction,” says Mathur.Others have also pointed to the time correction in prices. “Residential real estate prices in the top seven cities in India have seen a marginal rise in the past 4-5 years. This is lower than even the inflation rate,” says Ramesh Nair, CEO and Country Head, JLL India. 76357010The residential market will show green shoots only when there is visible improvement in the economy and the job markets- Ramesh Nair, CEO and Country Head, JLL IndiaBuyers must understand that real estate prices depend on various factors like location, quality of the projects and stress level of individual developers. A further price correction would be possible only if there is enough headroom available to the developer or he is under stress. “We may see price drop in single digits in places where there is oversupply along with weaker fundamentals. In preferred locations where there are quality projects built by developers which are not stressed, we may not see any correction at all,” says Mathur.Click here to download ET Online’s guide to everything personal finance in the times of Covid-19

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