The economists have marked the period between 2017 and 2019 as a difficult time for the Indian economy showing very little promise of a boost in the market sentiments. The downtime has also severely affected the real estate sector in India which is facing a rough spell at present. It becomes evident when we look at the condition of the financial capital of India, Mumbai, where a large number of projects remains incomplete and unsold across the city and suburbs.
While there is an acute fund crunch due to the ongoing economic crisis, a survey by National Real Estate Development Council, Knight Frank, and Federation of Indian Chambers of Commerce and Industry reveals a predominance of bearish attitude among real estate investors.
Experts indicate that a big stimulus package from the government would help resuscitate the real estate business in India and boost its growth for the long term. They suggest making several big changes at a time for a sustained revival of the industry.
The Real Estate Business in India and the Factors Leading to its Slowdown
The current crisis in the real estate sector in India is a result of several issues combined. Let’s take a peek at the top 10 reasons.
The economic slowdown in India has significantly reduced job security and employment opportunities. Struggling with the constant threat of unemployment, investment, especially in the real estate sector, has become a low priority for people.
Investment using unaccounted money has been the most favoured option in the real estate industry. Hence, the sudden cash crunch due to the 2016 demonetisation plan had a bad repercussion on investing in the real estate industry. Moreover, demonetisation also resulted in a more transparent deal and increased careful investment in real estate.
In the last few years, the real estate sector in India saw a surge in negative returns on investment, particularly in residential constructions. According to market reports, several locations across the country are experiencing this trend where the ROI is at just 2% – 3% even in the most popular cities. This has led investors from investing their money in real estate at present.
Price Improvement Expectation
The real estate investors are clever enough to not invest in the current scenario of depreciating properties. They choose to delay investing while anticipating prices to go down further.
Properties under construction were a go-to option for homebuyers due to their decent rates. Unfortunately, the increasing cases of delayed and stuck constructions have led to people losing faith in the real estate companies in India.
Poor Job Situation
The Periodic Labour Force Survey (PLFS) by the National Sample Survey Office (NSSO) shows a total of 6.1% unemployment rate in the fiscal year 2018. This stagnant job condition directly affects the attitude of potential consumers who must invest a huge amount to purchase a house.
Inadequate Loan Disbursement
Reduction in the amount of loan disbursement and the uncertain financial situation has led to the fewer purchase of properties. Earlier, 80% – 90% of loans were disbursed according to the RBI guidelines. Now, with only 70% loan disbursement, the potential consumers are required to make 30% down payment of the property value to secure home loans. This means less property purchase as many buyers do not have such an amount of money for upfront payment.
More Renting than Buying
For most Indians, particularly the baby boomers and Gen X, financial safety and independent living situations have been the primary reasons behind owning houses. Millennials, who are the current target customers, have a different approach to homeownership. Travelling to different cities for work being one of the main traits of the millennials, renting properties at convenient places has become a more popular and practical choice for them.
Focus on Other Investment Options
At its peak, buying a property was considered the best investment option in the Indian market. However, with the crash of the real estate sector in India, other forms of investment started booming and they appeared to be quite worthwhile. For instance, mutual funds have an affordable entry-level with a decent ROI.
The introduction of technology-oriented homes like Smart Homes is slowly taking over by making the traditional residential building market lose its significance. Furthermore, builders refuse to sell these houses at a lower price despite the market downtime and financial uncertainty of consumers, leading to a lack of demand. This has resulted in an addition to the economic slowdown due to inventory backlog.