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India's real estate sector faces a downturn. Expanding low-cost housing can show a way out
The sluggishness in the demand for residential housing in leading markets like Mumbai and Delhi has become visible, with several listed real estate companies reporting higher levels of inventory. The commensurate drop in the value of the housing portfolio of the leading financiers for the sector indicates that the pace of buying houses is not expected to build up for the next two quarters. For the first time, possibly, despite a rising population, India's real estate sector is facing a full-fledged downturn. Against this backdrop, the ministry of housing and poverty alleviation's move to push up the ceiling for low-cost housing might be a useful measure to get some demand built into the market. Access to housing means a rise in the net worth of a family. The security provided by it leads to a rise in demand for other goods and services too. From the banking sector's perspective, the exposure to the housing sector accounts for 10 per cent of non-food credit, so any slowdown here has a cascading effect.
As a recent report by real estate analyst firm CB Richard Ellis points out, the bulk of the expected demand for fresh housing stock will remain concentrated in the middle segment and low-cost housing this year. Some buoyancy had come in from the one per cent interest rate subvention offered by the Union budget this year. But for this segment to take off, home prices have to come down drastically. While the ministry, by raising the threshold for the definition of low-cost housing to include families with an annual income of Rs 1 lakh, up from the current Rs 60,000, has taken the right step; a house can be made affordable for this income group only if it is priced around Rs 5,00,000, that is, 60 times their monthly income. That sort of housing stock is scarcely present with any of the real estate companies. It is unlikely to materialise in the near future unless the government takes measures to cut the value of land from the pricing for this housing segment.