Home demand decelerates as high interest rates, costs bite

January 23, 2023

The momentum in the housing market is showing some signs of deceleration with exhaustion in pent-up demand and persistently high inflation and the relentless hike in interest rates taking their toll.

Softening in demand is likely to persist at least for the next 3-6 months, analysts feel, as long as the interest rates are on a rising trend and pricing remains at an elevated level.

Quarterly (October-December) figures by some of the leading real estate companies show that sales bookings have shown an outright fall or the growth has definitely slowed down, sequentially. In some cases, the price realisations have decreased, an indicator that companies may have had to sell at reduced prices or their sales are occuring at price points lower than what they saw previously.

Rohan Sharma, Director, JLL India, said with high interest rates and pricing pressures, customers would be more cautious of their purchasing decisions.

Home loan rates have moved up from 6.5 per cent at the start of last year to close to 9 per cent, while in the last one year residential prices have increased by 7-10 per cent on an average. Sharma said the on-the-ground pricing indicated a double-digit growth in several areas. “The cost of home ownership is going up.”

Sobha Ltd, a leading realtor from Bengaluru, saw its sales in terms of area fall over 14 per cent in its home city from a quarter ago, while it was 7 per cent lower from a year ago. Sales value during the quarter went up mainly from higher price realisation in some of its projects, especially in Gurgaon where it had launched two new towers in the quarter. It gets about 60 per cent of its sales from Bengaluru. 

Macrotech Developers, which sells under the Lodha brand name, saw a 3.6 per cent sequential dip in its pre-sales. Ajmera Realty & Infra Ltd, which has projects in Mumbai, Bengaluru, Gujarat and Pune, saw its quarterly sales fall 20 per cent in terms of volume and 23 per cent in terms of value.

Oberoi Realty saw its sales fall nearly 45 per cent from a quarter ago and 67.5 per cent from a year ago in the December quarter. Pune-based Kolte-Patil Developers with presence in Mumbai and Bengaluru, saw its price realisation fall 4 per cent sequentially and 2 per cent on the year.

“For demand to pick up the interest rate cycle will have to reverse,” Sharma said, adding that even if there was a stop in the rate hike cycle, it would still remain at elevated levels. He pointed out that though people were talking about home affordability being high compared to 4-5 years ago, when it came to making purchase decisions homebuyers would not be factoring in that.

The recent spate of job losses in the technology sector, among startups and the threat of a recession has also created a psychosis among the salaried class who are more inclined to delay big-ticket purchases. 

Another phenomenon that is being noticed, particularly in the southern cities, was a flight to quality that is affecting current sales. Customers are waiting for newer and bigger projects to launch that are in the pipeline. 

A recent report by a property consultant on new launches and units sold in 2022 showed supply exceeded demand for the first time in nine years. Unsold inventory is piling up and Sharma said while the time to sales was lower than three years, it would be bad news if it exceeded that. 

Developers may try to contain prices in the short to medium term in order not to upset the gravy boat, but with China opening up and demand resuming raw material prices, that have cooled off in recent months, may again start rising.

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