Why homes aren’t selling in Delhi and Mumbai

This has been a monsoon of discount offers for residents of Mumbai and Delhi. Every day, a barrage of messages, emails and media advertisements assail us, from desperate real estate firms. A housing slowdown has been around for some time but now there are visible signs of panic.

But buyers, particularly in north India, are just not interested. Sellers, having patiently waited it out so far, are now beginning to throw in the towel. An equilibrium will be reached eventually, but before that there may be more blood on the housing street.

A recent Knight Frank report says that the residential housing market in Mumbai remained absolutely flat in the first half of 2018, despite prices falling nearly 10% in this period. The city has more than 1.2 lakh unsold flats. Some estimates suggest that it may take four years to clear Mumbai’s unsold housing inventory. In Delhi, this number is even higher, at 1.5 lakh units. And for the top seven Indian cities, there are now nearly half a million unsold flats. This is scary. Demonetisation, RERA and GST have been tossed around as reasons for a while now, but it is time to question whether a deeper malaise affects the Indian real estate sector.

There are two types of home buyers in any market: genuine purchasers who acquire for self-use; and investors who regard it as a proxy to a financial instrument. It is the latter that sparked the initial decline, post demonetisation, as access to black money became problematic. Yet, Indians are very ingenuous at working around such constraints and cash is back in play, after a temporary hiccup. But the housing market is still dead. This is because returns have dried up. Investors may have worked out ways around the stick, but it is the carrot that continues to be elusive. Actually, what has happened in the real estate market is the exact opposite of the equity market. Where a switch has been snapped on with regard to stocks, with retail investors relentlessly pouring in money through SIPs every month; a switch has gone off in the real estate market. With practically no returns over the last three years, people have simply abandoned it as an asset class. Episodes such as Jaypee Greens have only added to the disillusionment.

That is only half the story. Even genuine home buyers have dwindled. The obvious reason is that prices are on a steady decline. Buyers aren’t foolish and they can see the pile of unsold houses and signs of desperation from sellers. Prices have corrected about 10-20% in most north Indian cities but people are prepared to play the waiting game. The reality is that total costs of properties in metro cities are still way too overpriced. In Mumbai, the average cost of owning an apartment is eight times a family’s annual income. In Gurugram, it is five times. This is exorbitant. In comparison, southern cities like Hyderabad, Bengaluru and Chennai are far more affordable, a reason why the housing slump is far less pronounced there. In this game of blink between buyer and seller, the buyer has the upper hand now.

Prices may have to correct more. But, a bigger fundamental issue may be that the current generation of younger, salaried people don’t seem to have the same sentimental attachment to owning a home as their parents may have had. Earlier, a home meant security. Now, a more financially savvy generation has figured out that in a market of inflated prices and relatively low rental yields, it may just be prudent to keep renting, as opposed to owning.

Ownership, after all is notional. Whether your landlord owns it or your housing finance company does, is hardly material. One shouldn’t be alarmist and conclude that the housing market is dead for good. In time, it will recover but it is important to distinguish between a cyclical slump and a fundamental reset. We are in the throes of the latter. The way an average Indian buyer looks at a home may have changed.

Udayan Mukherjee is consulting editor, CNBC TV18

The views expressed are personal

First Published: Aug 04, 2018 16:00 IST