‘Home prices have to fall’⁠— Indian government’s stern message to realtors has other backers too

• Property demand in India has been on a downtrend for a few years now but prices of new homes have not fallen as drastically as the demand itself.
• This year, when India’s GDP growth hit a six-year low, Bengaluru, Delhi and Mumbai were among the world’s top 50 cities for rising property prices.
  
• Developers with deep pockets have held out with their inventory and waited for the demand to return.
• Developers say they can cut property prices only if the government is ready to lower the circle rate.
  
• Pushing property prices may encourage new buyers but it will affect the sentiment for existing home owners.
  
  

Home prices in India have to fall, Union Minister Piyush Goyal gave a clear message to all the developers. He told a clutch of builders that they should sell properties at lower prices and not wait for the government to bail them out.

“We are trying for some concession but if not you will have to sell. Now, it is up to you. I cannot be more explicit about it. But unless you reduce your rate, believe me, you’re stuck with your material,” Goyal told builders.

“You can either get stuck with the material, default the material and then the material goes away: or they can choose to get rid of it, and “look at it as an unfortunate situation and move forward,” he added.

Not surprisingly, those who invested in real estate stocks weren’t very happy.

Real estate shares were trading negative on May 4


Property demand in India has been on a downtrend for a few years now but prices of new homes have not fallen as drastically as the demand itself, particularly in big cities like Mumbai and the National Capital Region. In fact, a survey by the Reserve Bank of India last year found that homes had become less affordable between 2015 and 2018 while the demand was still slack.

Between October 2018 and October 2019, the average price per square feet, across India, has only gone up while unsold inventory of homes remained high. Even in the first quarter of 2020, when India’s GDP growth hit a six-year low, Bengaluru, Delhi and Mumbai were among the world’s top 50 cities for rising property prices, according to a Knight Frank report.

Developers with deep pockets have held out with their inventory and waited for the demand to return. But the COVID-19 crisis has pushed the possibility of recovery further into the future, while developers have piled on loans as well.

The Indian government has also stated via Goyal that it may not be able to finance developers in a way that they can hold longer and wait for the market to improve.

It’s not just the government
Billionaire banker Uday Kotak, executive chairman of Kotak Mahindra Bank, and now the chief of the Confederation of Indian Industry (CII), has recommended that real estate developers must clear their inventory.

“They should not be looking at the rear-view mirror while driving a car, but looking in front. if the prices drop, people who have not bought homes for decades will do so.” Uday Kotak said. Previously HDFC Chairman Deepak Parekha suggested a 20% correction in home prices.

Builders want something else
Even realtors agree that people aren’t keen to buy homes at this stage. A recent report from real estate consultant Knight Frank showed that the sentiment in the sector, between April to June 2020, was as bad as it was in the second half of 2017. 69% of those surveyed expected “sales to remain tepid or go down in the next six months.”

Ironically, 75% of the stakeholders said the price appreciation will remain muted. They didn’t say it will go down, which should be the case for any product where the supply outstrips the demand.

“At some level, the suggestion by the honorable minister to developers to lower prices is valid as it may help reducing inventory, though it may not be the most viable,” Shishir Baijal, Chairman & Managing Director, Knight Frank India said.

According to Niranjan Hiranandani, managing director of Hiranandani Group, developers would only cut the prices if the government is ready to lower the circle rate. ““The fact is you can’t reduce prices any more, and you can’t reduce prices more because Section 43 C (A) of the Income Tax Act prohibits reducing rate below prevailing circle rates,” said Hiranandani.

The debate is just hotting up.

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