When it comes to real estate, demand is a complex exercise, as homes are bought for consumption, investment and sometimes investment-cum-use. However, comprehensive analysis can definitely help chart the trend.
The real estate demand forecast has always been a puzzle for economists. Economics suggests that demand for consumption products like iPhones, cars, mobile data has declined, which means that their consumption increases as prices go down.
For investment products like equity, trading volume decreases as prices fall, which reduces demand. However, when it comes to real estate, the forecast of demand becomes a complex exercise, some buy homes for consumption, some buy homes for investment, and some are looking at homes for investment-cum-use. Therefore, the forecast of demand has always been a puzzle. However, comprehensive analysis can certainly shed a good amount of light on the expected trend.
A. 30 years of experimental evidence
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Since 1990, the property market has had three bull runs and three recessions. Interestingly, they are all inspired by the events of big ticket.
In 1992, the government relaxed rules for flow of NRI money into Indian real estate. This big decision led to the first bull run in 1993, which lasted till the emerging market crisis of 1995. During 93-95, many Nris had their first hobby of buying property in India. Navi Mumbai was the biggest beneficiary of the bull race.
The 2001 quantitative easing by the US Central Bank after the 9/11 crisis reversed the recession of the late 90s. Many other central banks followed simple finance policies. Free flowing money mostly entered Indian real estate through FDI in real estate. This led to a historic boom in real estate, which lasted until the 2008 US housing crisis.
The US government has given a huge boost to liquidity to fight the housing crisis. With many countries following big daddy, global liquidity found a way to re-enter Indian real estate through real estate funds, HFC, etc. So, after 2009, realty prices were again up.
And then came triple trauma in 2016-17 for real estate developers (demonetisation, GST and RERA). This led to a major downturn in the real estate market across India.
After the Covid-19 hit, we have a situation where most Western economies have developed a sea of liquidity. This has generated income near or less on Treasury bonds. Therefore, during the next twelve months, this additional money will be seen entering Indian real estate. Then, by 2022, real estate will boom.
B. City-specific analysis
While every city in India has its own character in the real estate market, most of the big cities follow the Mumbai market. Mumbai is the largest real estate market and will continue to set trends across India. Most of The Local Indicators of Mumbai now confirm that they are exiting the Mumbai market.
1. Narrowing the gap between income and EMI
The lockout has reduced the income of home buyers. However, income has been rising for many years now and property prices and interest rates are moving south. Consequently, we have a situation where the income ratio from EMI has come down from about 50% in 2014 to about 25% in 2020. And th is is a very healthy indicator.
2. Reducing stagnant demand and supply
During the last three years, the developer’s high level of debt on balance sheetforced him to liquidate inventory to express his commitment to the lenders. As a result, we saw a drop in market prices. This pressure will be reduced as more money flows into the system, resulting in a significant decrease in stress levels and reduction in discount deals. Moreover, the number of developers in Mumbai has decreased by 40 per cent, which will further strengthen the supply.
In terms of demand, Mumbai’s annual sales have remained steady at 25,000-30,000 residential units (see Table 2). Steady sales in the Barish market indicate that the market has been dominated by almost the end users (most investors prefer to invest in the emerging market). The initial indication of the upcoming bull market is that the annual supply of housing units in the Bombay market is declining. In fact, supply has laged behind real demand in the last two years and this deficit has led to a drop in inventory overhang. Therefore, we are not far from the issue of flexibility.