It is an excellent time for housing investors who know what to buy and can stay invested for at least four to five years. Urban housing prices have stagnated for a long time but are now rising again.
There are two reasons for this — one, increasing demand after 2020, and two, unrelenting cost inflations for developers, which they cannot absorb any longer and must pass on to their customers.
There is little chance of cost inflation reducing. It results from supply-chain disruptions and pricing cartels created by raw materials suppliers. While supply chains may ease up in the future, the second problem is endemic, and only some compelling moves by the government can break it. The demand resurgence is also here to stay.
While housing prices are increasing, Indian developers will be careful not to price their projects out of the market. In a dynamic called ‘price discovery,’ they will only raise prices to an extent the market is willing to bear. Developers benefited from the demand boom post-COVID-19 and will not become too aggressive with pricing. But the combination of unavoidable cost escalations and healthy demand still means that prices will rise — gradually but surely.
Housing prices have gone up by at least 8-10% across the major cities already. We will have seen another 8-10% price increase in most urban markets two years from today. In 10 years, prices will go up by between 20-35% and - even higher in some micro-markets.
Appreciating potential
Affordable housing was the poster boy of the Indian housing market for several years since 2016. This was also due to the government’s Housing for All vision, which actively incentivised affordable housing, and also because it was the cheapest way to homeownership.
But as an investment asset class, affordable housing is having a terrible time right now. After the pandemic, demand has shifted to bigger homes even if they are in suburban locations. People want a larger locus of control when it comes to safeguarding their families’ wellbeing during health scares like the pandemic.
Millennials, who previously avoided homeownership and preferred renting as per their requirements, have suddenly become very convinced buyers — and they want larger floor spaces. The working from home (WFH) and hybrid work options have put a bigger focus on the home as not only a place of residence but also as a place of work. This requires sufficient room for the family to multi-task in, and affordable housing is primarily made affordable by its smaller sizes.
Zero impact
All the previous rationales that drove affordable housing — that it is the biggest requirement in the country and that it constitutes the highest shortfall of housing — remain true in theory but are having zero impact on the new housing demand.
As a result, because supply follows demand, developers have started churning out bigger housing options and are giving budget housing a miss. This is unlikely to change in the future unless the government announces new schemes and incentives for buyers and developers of such housing and makes land available in areas where budget housing is most required — in the city centres, near workplace hubs.
This could kick-start a new wave of demand from the lower-income groups. However, given that land is the costliest component of housing prices, it is unlikely to happen. If you’re looking for housing options that perform well as investments, you will need to think bigger — literally. Mid-range and premium homes with bigger living spaces are now hogging all the investor limelight.
Within this category, gated communities and integrated townships are now the most popular with homebuyers. Demand for properties in such townships will overtake all other housing types in the coming years. Why? Because of the new constraints and concerns brought about by the COVID-19 pandemic.
Homes are now being bought to literally act as future-proofed fortresses against any unforeseen events like the pandemic. Indian homebuyers now long for privacy, security, generous open spaces, a walk-to-work option if possible, and adequate common facilities.
Both homebuyers and tenants are now on the lookout for ease of living, overall safety and security from both a general and pandemic point of view, and wellness-oriented features and amenities. Buyers also want large enough homes to accommodate WFH and e-schooling comfortably, should these options exist or become available again.
Needless to say, none of these options are compatible with the affordable housing format. When will demand for budget housing return convincingly? It’s anybody’s guess; as stated, there are steps that the government can take to boost demand there again, but housing investments must consider current and future demand. On that score, affordable housing does not have much for in the foreseeable future.
The writer is Managing Director, Pharande Spaces.
