Is this a good time to buy a house? Impact of COVID-19 on property prices, Buyers market - builders discounts

This could just be the ideal time to invest in India’s real estate market; there are many reasons why.

Real Estate Is this a good time to buy a house

India’s economy is only just beginning to find its feet, with the centre announcing relief packages and the state governments cautiously lifting their respective lockdowns in phases, but full recovery still looks a distant hope. As a result, liquidity remains a huge problem for both employers and employees. 

While companies across sectors are yet to hit full throttle, those who have been retrenched or taken pay cuts are still largely unemployed or working on slimmer pay packets. At a time like this, is it a prudent life decision to buy a house, or even start thinking about it?

Actually, this could an ideal time for real estate investing. Let’s understand why.

Taking the plunge

In turbulent times, you could fear that the next job to go could be yours; and if not that, perhaps face a cap on salary increments for the next few years. But if you can muster up the courage to take the plunge, you may end up taking advantage of the situation to get a good deal for yourself in a property purchase. 

There are enough reasons to justify such a decision. First, there is the age-old wisdom: it makes sense if the money you spend as monthly rent can be spent as home loan EMIs. A permanent roof for you and your family is a big assurance, because at a time like this when there’s no job security, having to pay a monthly rent can be a source of worry. 

However, the single most important reason that makes investing in real estate as a homeowner a sensible decision is this: the pandemic has weakened Indian real estate developers, and they are no longer in a position to call the shots. This gives you an upper hand as a buyer. You can seek discounts, freebies, concessions like deferred payments, and easier terms. 

Related: Confused in Real Estate Investment ? Here are 6 myths you can stop worrying about

We will look at these points later, but first, a word of caution.

Look before you leap

Real estate investment in India in the current situation makes sense only if you see yourself as the homeowner of the residential property you are buying. If you are thinking of going into real estate investing to rent out the property, it could be a bad idea. Joblessness, pay cuts, fall in income from sales (which is particularly true of small businesses) means tenants across the country are skipping paying their rents. This should strike a cautionary note for any real estate investor.

According to media reports, rents of upmarket properties in Mumbai have plummeted; by one estimate, this fall has been up to 25%. The report talked of a lease deal that was closed for Rs 3.25 lakh a month at a high-end Worli apartment during the lockdown; the rent was Rs 1.25 lakh more before the real estate market tanked. In Bengaluru, tenants are moving into bigger apartments without paying a rupee more.

It is not only the upper end of the rental arc that has been hit, even a low-end segment like student housing has felt the impact of the pandemic, warns a report by consultancy Ernst & Young. “Once the normal curriculum resumes, an overall downward impact of 5% in EBITDA is expected for the next 12–18 months, subject to few questions to be answered as the situation unfolds,” it said.

Related: GST rate cuts on real estate: How will it benefit homebuyers

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Property glut

At the beginning of this year, before the pandemic struck India, ratings agency India Ratings had noted in a report on the real estate sector that its housing affordability index (increase in housing price/increase in salary) had shown a marked rise compared to the base year of FY12. As a result, residential players had begun expanding their portfolio in the affordable segment. 

What also helped, it said, was a “favourable policy support” in the form of credit-linked subsidy schemes, lower GST, and exemption under income tax. Alongside, it had warned that companies with completed inventory will be in a better place in terms of offload risk than those with under-construction projects, as demand in general is “driven by end-consumers who are averse to risks.”

But COVID-19 upset this prediction, as data from real estate advisory Jones Lang LaSalle (JLL) shows. Sales over January to March-end fell sharply compared to the previous year, even as new launches rose. “The homebuyer community deferred their purchase decisions in light of the impending crises, which led to sales dipping by nearly 30% in Q1 2020 on a y-o-y basis,” said JLL in its first-quarter report on the sector. 

Data from another housing consultancy Anarock shows that as on 31 March 2020, India’s top seven cities were saddled with over 6.44 lakh unsold units.

Related: Beware of these 6 fees when buying real estate 

Distressed developers

So severe has the pandemic been for developers that they are billing it as the third Black Swan event in recent years – after demonetisation and RERA (Real Estate [Regulation and Development] Act, 2016).

Developers, especially those engaged in the residential property segment, had been facing liquidity constraints even before the pandemic broke. The nationwide lockdown worsened the situation by triggering a string of interdependent developments that worked to ground property transactions to a halt.

First, it severely disrupted supply chains, leading to cost overruns – i.e. more liquidity issues – as under-construction projects got stalled. Anarock Consultancy now says construction delays could in many cases run up to two years. Moreover, these delays also worsened the cash crunch as incomplete projects do not earn revenues.

The lockdown significantly eroded the base of potential homebuyers, who were forced to stay indoors and defer purchase plans, further complicating the liquidity issue. Then there was the unprecedented labour exodus; the lockdown is reported to have forced some 10 million migrant workers to return to their villages, and the real estate sector is one of the worst affected. 

What’s more, there is an acute shortage of construction materials such as steel and cement due to the domestic lockdown. But as real estate portal 99acres points out, logistics breakdown has also hit imports of construction materials like iron and steel products from China.

Buyer’s market

All in all, the immediate future looks gloomy for real estate developers. This has also been reflected in the real estate sentiment index of NAREDCO (National Real Estate Development Council), prepared in association with industry group FICCI and consultancy Frank Knight.

The index conveyed the optimism that developers felt about the residential sector in the October–December quarter of 2019, but sentiments dipped in the first three months of 2020. According to it, developers were far from upbeat in January–March across three critical parameters: new launches, sales, and price.

Media reports say desperate realtors are now trying to woo homebuyers with attractive offers such as refundable booking amounts, cashback schemes, and freebies on booking. Mint reported a scheme that involves staggered payment of booking amount: Rs 1 lakh as the first tranche, and the remaining booking amount over the next 100 days, with the option of cancellation within 90 days with a full refund.

In another scheme, the developer is reported to have offered cashback of 5% of the property cost if the booking was made during the lockdown. As a potential homebuyer, you should take advantage of these offers.

Yet another attraction is the low home loan rate interest rates that PSU banks have begun offering after RBI reduced the repo rate on May 22; the lowest home loan rate interest rate is now 6.85%, which is being offered to salaried individuals.

Last words

If you are planning to make an investment in the real estate market right now, you should look for a ready-to-occupy property; avoid units that are still under construction. As Anarock warns, construction delays might run up to several months for well-funded projects; while for others, the delays may even last a couple of years. 

This could mean an unnecessary financial burden if you are a rent payer who is also required to pay EMIs during the time overrun of the project. As the pandemic has been declared a national disaster, you will not be able to take recourse to RERA to recover any penalties. 

Above all, remember to read the fine print if you take up an incentive offer, and check the cancellation clauses in case the developer decides to cancel your booking later. Look at these 5 Popular ways to transfer your immovable property.

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