7th Pay Commission: Will higher pay translate into greater demand for real estate?

[] With the 7th Pay Commission providing for an increase in the salaries of government employees and pensioners, we examine how this will affect the purchasing power of home buyers and the real estate segments that could benefit the most

The 7th Pay Commission has been notified and the salaries of central government employees and pensioners, are set for a major revision. This is likely to boost demand and liquidity in the real estate market, according to experts, who cite the implementation of the 6th Pay Commission in 2008. In 2008, the property market was in a bad shape after the global financial crisis and the pay commission helped in boosting home sales, they say.

The 7th Pay Commission’s proposal to hike the salary and pension of central government employees, should help address the demand-side economics of real estate, agrees Sachin Sandhir, global managing director – emerging business, RICS. “There is a large volume of unsold inventory of homes across cities. So, there is no shortage of supply. However, the demand for homes has been weak and a higher disposable income, in the hands of home buyers, may help revive home sales,” explains Sandhir.

Importance of the 7th Pay Commission notification

According to the 7th Pay Commission, the increase in salaries of government employees at the base level, is from Rs 7,000 per month to Rs 18,000 per month and at the maximum pay level, from Rs 2.25 to Rs 2.5 lakhs. Hence, the maximum increase is at the bottom of the pyramid, where one can anticipate increases in consumption, as well as savings.

[] Property: The 1st choice among 7th Pay Commission beneficiaries

“This could result in higher demand for residential properties in the affordable housing segment, where units are priced in the range of Rs 15-25 lakhs. For beneficiaries under the Pradhan Mantri Awas Yojana (PMAY), there is an additional advantage of interest subsidy from the government. Even though the percentage of HRA has been reduced marginally, the overall impact could result in higher spend on rentals. Increase in the base pay and DA-linked components of the salary, will also improve the purchasing power of home buyers. This will increase the disposable income in the hands of the consumer,” explains Nidhi Seksaria, advisory partner and leader – real estate and construction, BDO India.

Realty segments that will benefit from the 7th Pay Commission notification

Experts believe that the affordable housing segment could witness a lot of investment, from the beneficiaries of the pay commission hike. In cases where people already have first homes, the demand could be towards investments in land. As 80 per cent of central government employees reside in tier-II and tier-III cities, there will greater investment in properties in these areas.

“It is unlikely that the pay commission hike, will have much of an impact in expensive property markets such as Mumbai or in the luxury housing segment. The beneficiaries of the pay hike are unlikely to invest in luxury homes and would, instead, prefer to buy mid-income or budget homes. Consequently, we could see an increase in the demand for mid-income homes, in cities such as Noida, Navi Mumbai, Pune, Hyderabad and Bengaluru, which have good physical and social infrastructure,” adds Sandhir.

With the government also announcing several schemes to boost affordable housing, this segment could witness greater supply and thereby, offer exciting options for potential home buyers. Moreover, with higher pay packets, buyers who had been sitting on the fence, could finally commit to an investment. This will bring more liquidity into the real estate market and help restore demand.

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Debora Berti

Università degli Studi di Firenze, IT

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