Housing Market Recovery: Where, When and How?

Anil Pharande | Housing Market recovery; The second COVID-19 wave has taken India by storm, over-stretching the healthcare infrastructure far beyond its capacity not just in top urban centres but penetrating deeper into rural areas. Even the most developed nations including the US would have failed to stay strong in the face of such ferocity.

However, despite the ongoing restrictions, most state governments have allowed critical economic activity - including construction. There are good reasons for this - not only does real estate contribute as much as 7-8% of India's GDP, but more than 50 million of India's labourers depend on construction for their livelihood. Also, there is still good demand for homes and the government cannot afford to forego the revenue generated from property registrations.

After the first wave, residential real estate recovery picked up as seen in the last two quarters. The increased demand was far beyond expectations. Housing demand in the times of COVID-19 has become an amalgamation of multiple factors.

There are many new first-time homebuyers, and many existing homeowners want to upgrade to larger homes so that they can work from home comfortably. Many are looking to shift to (or buy second homes in) outlying areas where they can buy bigger homes and live and work from home more safely with their families.

Thus, housing recovery after the second wave will again be the fastest among other sectors. We may see some green shoots from the third quarter of CY 2021 itself if a convincing downward trend in cases sustains and vaccines are rolled out more widely.

Which Budget Category Will Recover Fastest?

The luxury housing segment did very well last year because the impact of the pandemic on this income class was minimal. Many luxury home buyers sensed an opportune time because of the discounts and offers available. This time too, the second wave will have a bigger impact on the affordable and middle-income segment over the short term.

With the second wave, the coronavirus has gone on to impact the relatively younger age groups with many middle-class denizens. While there is ongoing demand from the upper-income bands within the middle class, generally priorities are currently skewed towards cash preservation to meet possible medical emergencies.

As for recovery, the middle and upper-middle-income housing segments will bounce back fastest. When cases reduce and the economic impact of the pandemic subsides, middle-income homebuyers will return to the market for value buying. However, affordable housing will continue to face a grim situation. MSMEs have been impacted by both the first and second wave, and this directly impacts the affordable housing buyer class. Thus, affordable housing may take longer to recover.

Impact on Property Prices

The current temporary slowdown in housing demand because of the second wave has got expectations going for a price correction. The reality is that developers will eventually be forced to increase property prices if the current rising inflationary trends continue. While demand may be low, the operating costs for developers have already gone up hugely during the second wave.

Many of the larger players are providing additional safety protocols to their workers on-site, paying for their vaccinations and other medical needs, etc. Additionally, raw material costs including cement, steel and even labour cost have all gone up in recent times. This will ultimately cause developers to pass on the extra costs to the homebuyers.

Larger Homes - Still in Demand

There is little chance of developers reducing home sizes in their new projects to make them more affordable. If we look at the present demand, bigger size homes are still the top preference of homebuyers today. Though Covid-19 cases may begin to subside, the work-from-home trend is likely to continue in the future with many companies following a hybrid model.

Many companies will adopt the rostered work concept wherein employees can come to the office for some days of the week and work from home on other days. In short, the demand for bigger homes will continue so there is little justification for developing smaller units.

Developers have become cautious and many are postponing new launches for a more opportune time. Those with financial capacity are continuing construction activity at sites. Since the highest demand is for ready homes, there is considerable reason for completing housing projects. All in all, the second Covid-19 wave is not a doom situation for real estate. Demand may remain slow for a few months but pick up again as soon as cases recede.

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