Indians just aren’t buying new homes anymore

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Even plummeting prices haven’t been able to entice India’s home-buyers.

Home purchases in the country fell to a seven-year low in 2017 despite sliding prices, according to real estate consultancy firm Knight Frank. A new tax regime and a regulation introduced last year have pummelled a sector already reeling under the aftermath of demonetisation in late 2016.

“At the end of 2017, India’s residential sector appears to have shrunk to a fraction of the size it was less than a decade ago,” said Shishir Baijal, chairman of Knight Frank. New project launches fell 41% and sales of new homes fell 7% in 2017. There are still hundreds of thousands of unsold properties, and it may take nearly two years to sell off just those, the report says.

Reform roulette

India’s real estate market never fully recovered from the 2008 financial crisis. And since 2010, it has remained depressed with new launches falling by 78%.

The banning of two high-value currency notes in November 2016 came as a body blow as the sector is known to deal with a lot of cash. And before the developers could catch their breath, the government, in May 2017, introduced a regulator and a new set of rules to make transactions more transparent. Finally, the knock-out blow came in the form of the goods and services tax in July 2017. Developers could not pass on the higher tax burden amidst sliding demand.

Not surprisingly, property prices tumbled in many cities.

While other parts of India suffered, even Mumbai, India’s most expensive housing market, bled as property prices fell in 2017—the first time in nearly a decade. Yet, the price-to-buyer’s income ratio (the average number of annual incomes required to own a house) in Mumbai remains at a prohibitive 7.8—much higher than in other major Indian cities—even though it is off its peak of 11 in 2010.

To counter the slump, developers have been offering discounts, and waiving stamp duty, and floor-rise and other charges.

But things are likely to improve in the future, the Knight Frank report says. In particular, the drop in prices and the reduction in unit sizes will help boost affordability, it said. “The past 12-odd months were an acid test of sorts for the real estate sector in India,” added Baijal. “Its overall resurrection would depend upon the long-term impact and benefits of the structural reforms brought in over this time.”

qz.com