Home buying sentiment to weaken but new supply is kicking in say analysts

• Analysts say that rate hike impact is being felt on the affordable segment and may remain so for a few more quarters, even as luxury segment demand is still robust.
• Along with the impact of rising property prices, multiple layoffs across large and small corporates is also affecting homebuyer sentiment.
• Customer demand to remain cautious in the next few quarters as homebuyers are likely to delay purchase decisions.

After a year of registering stellar sales in 2022, real estate demand is all set to slow down this year, say analysts. In spite of the pause taken in interest rate hikes this April, home loans have become costlier in the last six months – and will start having an impact on demand.

Interest rates have a direct correlation to housing demand, due to the large size of home loans – where a few basis point rise in interest rates can set buyers back by a few lakhs.

Since May last year, the Indian central bank hiked interest rates six times totalling 250 basis points. The minutes of the meeting of the last monetary policy committee indicate that the rate tightening cycle has not ended.

In the meanwhile, buoyed by the pandemic-induced demand and falling inventory, real estate developers have been launching new projects.

“While near-term demand is likely to be impacted adversely by recession in the US/Europe and the tech slowdown, supply glut continues unabated,” said analysts at Nuvama Institutional Equities.

Top 7 cities recorded new launches of around 1.09 lakh units in Q1 2023 against 89,100 units in Q1 2022 and 92,900 units in Q4 2022 — indicating a rise of 23% on annual basis and a rise of 18% from the previous quarter, as per a report by CII-Anarock.

The National Capital Region, Mumbai Metropolitan Region, Bengaluru, Chennai, Pune, Hyderabad and Kolkata are the top seven cities as quoted in the report.

The effect on affordable homes
Until now, the interest rate hikes have pushed base home loan rates to around 9%, and any more hikes can change the way Indians would re-think home buying. Due to the consecutive rate hikes, borrowers have exhausted the options to increase their loan tenures and keep EMIs unchanged.

“Banks and NBFCs have, however, till now supported the demand by offering discounted spreads on the benchmark rate. The rate overhang is not expected to end any time soon and may see a few more quarters of uncertainty,” said a report by HDFC Securities.

Analysts say that most of the rate hike impact is being felt on the affordable segment and may remain for a few more quarters while luxury segment demand is still robust.

“Till now, the 250 basis point rate hike post-Covid has failed to dent the underlying secular housing demand in the sector. However, we are seeing early signs of weakness in the affordable segment. This is on an expected line as this segment is most sensitive to a rate change as it directly hits the loan eligibility,” said a report by HDFC Securities.

Affordable housing refers to housing units that are affordable by that section of society whose income is below the median household income – with a square footage of 600 sq feet or below.

As per the CII-Anarock report, the mid-segment homes priced ₹40 lakh-₹80 lakh continue to dominate new supply with 36% share. This is followed by the premium (₹80 lakh - ₹1.5 crore) with a 24% share and affordable segments (less than ₹40 lakh) with 18% share.

As per analysts the demand projections for the premium or luxury segment might remain unaffected — but that caters to only a third of the new supply that’s being added.

Sentiment suffers too
Along with the impact of rising property prices due to input costs, multiple layoffs across large and small corporates is also affecting homebuyer sentiment.

Amid a liquidity crunch, 16 startups have laid off 100% of their employees in 2023 and three of these startups were Indian -- WeTrade, Fipola and DUX Education, according to data from Layoffs.fyi.

“Recent layoffs by both large and small corporates are likely to have at least some impact on the demand in the upcoming two quarters, and dent growth in the housing market. Many homebuyers impacted by layoffs may defer home buying decisions until their employment situation stabilizes,” said Anuj Puri, chairman of Anarock group.

Demand for high ticket homes remains intact
The two realty hotspots NCR and MMR have seen particularly strong momentum in the sale of high-ticket bigger homes over the last few quarters, finds the CII Anarock report ‘The Housing Market Boom’.

The report highlights survey findings that tells 96% surveyed buyers confirm that further home loan rate hike will affect housing demand.

“Demand in the luxury segment has been robust and has been the driving force for higher price realisation; the NCR market that saw the maximum price appreciation this year has been driven by demand for luxury housing,” said a report by HDFC Securities.

Anarock data reveals that average property prices across the top 7 cities increased in the range of 6-9% in Q1 2023 when compared to Q1 2022, mainly due to an increase in the prices of construction raw materials and overall rise in demand.

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