Favourable for buyers: Affordable housing focus may lead to further price correction

Recent measures taken by the government, coupled with the continued pressure on the real estate market would further bring property prices down.

Written by Sandeep Singh | New Delhi | Updated: February 17, 2017 12:55:36 pm
budget, budget 2017, affordable housing, real estate, budget affordable housing, affordable housing scheme, budget arun jaitley, central government budget Experts say that with additional benefits made available to affordable housing projects, the scope of demand will get widened. Express Photo

Rajiv Mehrotra (name changed) is negotiating the price to purchase a house in the secondary market of Noida’s Sector 93. The flat is on the same floor on which his friend Gaurav (name changed) bought his house, a year ago. While Rajiv has already managed to negotiate and bring the price down to Rs 5,050 per sq ft, it has come as a big surprise to Gaurav who bought the same-size flat on the same floor, last year at Rs 5,800 per sq ft. “I thought I had cracked a great deal by bringing the price down from around Rs 6,500 per sq ft to Rs 5,800 per sq ft after six months of negotiations. But, now I feel I should have waited a little more,” said Gaurav.

This is reflective of the continuing pressure in the real estate market which is burdened with high unsold inventory, financial stress on developers, delayed delivery of projects and low demand for such houses. If real estate experts are to be believed, the situation may not improve soon, and the price correction in the existing market may continue for some more time as it is undergoing a structural change on account of the government’s push for affordable housing and big developers entering that market.

“The government’s move to push affordable housing is set to bring a structural change in the real estate market both on the stock of the assets in the market and on price front. While big developers will enter the affordable housing market and launch such projects at lower rate, the developers will also be forced to reduce the price of their existing projects which are not witnessing much demand,” said Samantak Das, chief economist at Knight Frank.

In its Budget 2017-18 announcements last week, the government provided a big boost to the affordable housing segment. While it announced to give infrastructure status, which has the potential to reduce the borrowing cost for developers of affordable housing projects by 200-300 basis points; it also announced to allow bigger houses to come under the ambit of affordable housing thereby increasing its scope. The government even announced to relax the condition of period of completion of the project for claiming deduction from the current three years to five years.

While several developers, including Raheja Developers and Supertech announced the launch of their affordable housing projects in 2014-15 under the affordable housing policy of Haryana Urban Development Authority’s (HUDA) and Centre’s push towards ‘Housing for all by 2022’, just a day after the finance minister, Arun Jaitley announced additional relaxations/benefits for the affordable housing segment in his Budget speech, Wave Infratech launched its project ‘Swamanorath’ in Wave City on NH-24 under the Prime Minister Awas Yojna with houses at starting price of Rs 8.4 lakh.

“With interest rate declining and PMAY providing for interest subsidy, it’s a great time for homebuyers to purchase a home,” said Munish Mishra, head of sales at Wave City.

Experts say that with the additional benefits made available to affordable housing projects, not only will the cost of the development of such projects come down, but also the scope of demand will get widened. The developers will launch these projects at lower rates as compared to the rates they are charging for their existing projects, and with a lower price project already available in the market, this will also force developers to bring the price down of their existing  projects targetted at middle class and upper middle class.

“As a result of the government’s focus, I think that over the next 3-5 years, the real estate market will see a structural change with all major developers getting into the affordable housing segment and catering to their needs,” said Das. He added that while the fourth quarter of the calendar year 2016 was very bad for the sector across major cities, the unsold inventory across various markets may take another three to four years to get absorbed.

Earlier, on December 31, the Prime Minister Narendra Modi doubled the quantum of loan amount that can qualify for interest benefit under the Pradhan Mantri Awas Yojana for Urban areas in 2017. In addition to this he also announced a 3 per cent interest subvention for loans of up to Rs 2 lakh in the rural areas, taken for either new home or extension of housing.

By doing so the government has almost doubled the quantum of loan amount that can qualify for interest subvention under the PMAY scheme. The scheme, initially launched by the PM in June 2015 in his bid to provide ‘Housing for All by 2022’, offered beneficiaries an interest subsidy at the rate of 6.5 per cent for a loan amount of up to Rs 6 lakh. The scope of the scheme has now been enhanced to loans of up to Rs 12 lakh with interest subvention of up to 4 per cent.

Meanwhile, for the existing projects, one factor that may help the revival of demand is the ongoing decline in the interest rates for housing loans. While the RBI has reduced the repo rate by 175 basis points over the last 24 months, the home loan interest rates have now come down by around 150 basis points to levels of 8.6 to 8.75 following the latest round of rate cut by banks and housing finance companies.

While the prices may decline further from the current levels, market experts also point that both the continuing decline in housing prices and the low interest rates offer a good entry point to first home buyers in the bigger size housing segment too and buyers should start exploring the market to figure out a house in a project that is either ready for possession or approaching that stage.

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