[ecis2016.org] In a country faced with a huge housing shortage, what is the reason for unsold inventory in India? We examine the reasons
Isn’t it ironic that in a country where housing shortage is at the core of policy debates, housing surplus in India’s top cities is keeping builders on the tenterhooks? As a matter of fact, the reality of unsold housing units poses an even greater degree of imbalance than the housing shortage. Nevertheless, unsold inventory is a symptom and not the cause of malaise in the housing market of the country.
You are reading: Unsold inventory: A symptom and not the cause of the housing market’s woes
India’s urban housing shortage is more than 30 million units. In contrast, the number of unsold inventory is around 7 lakh units in the top 10 cities alone. This number doubles up when one considers the 30 key cities of the country. Sales in the Indian housing market have not exceeded two lakh – 2.5 lakh units per year. Add to it the number of new launches year after year and you have a confused housing market where the predominant reality is always about unsold inventory.
This raises certain fundamental questions:
- What are the reasons for the unsold housing units in the Indian market?
- Is it more of an economic slowdown, or there are inherent flaws in business calculations?
- What has caused the demand-supply mismatch in the housing market?
- Should there be fewer new launches, in order to maintain the demand and supply balance?
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Reasons for demand-supply mismatch in Indian real estate
On-ground realities suggest unsold inventory is more of a self-inflicted injury, on part of the developers. High housing demand and even higher standing inventory clearly suggest there is a demand and supply mismatch. Developers, instead of focusing on the demand in the market and catering to it, have focused more on availing of the maximum permissible FAR and density norms. So, a market that could easily absorb 1.5BHK – 2BHK homes, is flooded with 3BHK and 4BHK offerings.
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Vimal Nadar, head of research, Colliers India, points out that the housing sector was going through a slowdown over the last few years. This was led by various reasons. Developers focused on launching housing units in the mid to high-end segment, while the majority of the demand was in the affordable to mid-range. This led to an affordability mismatch, leading to high unsold inventory in the market. “Prior to the enforcement of the RERA in 2016, the housing sector was fragmented and lacked transparency. Home buyers often faced severe delays in getting the possession of their homes, with little option for legal redressal. This made home buyers wary of buying from lesser-known developers. Moreover, demonetisation also led to a further slowdown in the housing sector. Consequently, home buyers adopted a wait and watch approach, expecting to see a fall in housing prices,” says Nadar.
There are other developers, who have misread the horizontal growth potential of cities and ended up with huge inventory along the peripheral locations of cities. With no social and economic infrastructure in these places, there are many ghost cities waiting for occupants today.
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The role of property prices and input costs in unsold inventory
Similarly, some developers have been confronted by high input costs, thereby restricting their flexibility, vis-à-vis property prices. These factors led to a status quo in the market. Many ended up holding the inventory beyond their holding capacity.
Low rental yields, in the range of 2%, have always been a catalyst to the Indians’ reluctance to invest in additional properties. Till the time there was double-digit capital appreciation, Indians preferred property as the best asset class to park their money. However, the slow pace of appreciation (to the extent of inflation-adjusted depreciation) made the Indians wary of investing in more than one home.
Affordability, of course, remains the number one cause of unsold housing inventory in the country. In terms of the economic rationale, the thumb rule of housing purchase the world over, is that the price should not be more than five years’ of gross income. The second simultaneous condition is that the EMI should not exceed 50% of one’s take home salary. Another school of finance suggests that the EMI for the given house in the next 20 years should be equal to or lower than the rent paid for the same house during the given period of time. With this affordability test, a vast majority of the Indians, even in the top 10 cities of India, would never be in a position to buy a house.
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Ashish Narain Agarwal, founder and CEO, PropertyPistol.com, believes the factors causing unsold housing inventory are many and cannot be attributed to economic slowdown or demand-supply mismatch alone. Factors like legal issues associated with properties, unsuitable location, unreasonable pricing, etc., can also impact the sales of homes, he points out. “India’s real estate sector, which was seeing a revival after the pandemic, has recently met with unpredicted ongoing events that seem to deter the pace of growth for the sector. Considering some recent research reports on residential sales and also our internal customer data showing a steady increase in home buying in the past six months, it is quite evident that sales across the residential segment have not been hampered to a great extent. This can be attributed to availability of homes across segments, people’s desire to own homes and their increased purchasing power,” says Agarwal.
Are developers in-sync with buyers’ needs?
The Coronavirus pandemic also affected the market, as home buyers became wary of making a purchase in times of uncertainty.
Following the pandemic, there has hardly been any innovation in the design and layout or strategy that would suggest developers have become more cognisant of home buyers’ preferences and needs. Launches are more often than not out of sync with the market, in terms of ticket size, design, amenities, etc.
Should there be fewer new launches to maintain the demand and supply balance? Most of the analysts do not think that reducing the number of new launches will be a practical solution to bring a balance between demand and supply of homes. Demand for homes is very subjective in nature and the reason for home buyer’s preference towards a property and disinterest towards another may vary.
In a nutshell, the market is defined primarily in terms of the ability of someone to pay for what is available. The unsold inventory clearly suggests that the housing market fundamentals are positioned otherwise.
(The writer is CEO, Track2Realty)
Source: https://ecis2016.org/.
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Source: https://ecis2016.org
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