The real estate sector has been indicating a steady increase for the next two to three years in light of the growing inflation and interest rates. This article discusses several aspects of housing demand and how a nuanced interplay of consumer choices ultimately affects home purchasers’ perceptions. Continue reading to learn more about the current real estate market and the variables affecting it!

The necessity to own a home has become apparent since COVID-19, which has resulted in a boom in housing demand for the real estate sector. The real estate market in India is anticipated to rise to Rs 65,000 crore by 2040, despite growing inflation and interest rates that point to a consistent real estate growth for about two to three years. By 2023, the industry will be worth about Rs 81,000 crore, and by 2025, it would be a substantial 13 percent of the country’s GDP. Additionally growing and supplying India’s infrastructure are the commercial, hospitality, and retail real estate sectors.

Housing demand can be thought of as being affected by both headwinds and tailwinds, such as interest rates, unemployment, stamp duty and registration fees, inflation in home prices, and tailwinds like income growth, the availability of easy credit, redevelopment regulations, subsidies, and upgraded products on the market. Let’s look at how each aspect influences the demand for housing in India.

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What is the housing demand?

One of the main factors affecting housing demand is housing cost. The law of demand states that as prices drop, there will be a greater desire for home ownership. However, the demand for housing could decrease if prices continue to rise. The wealth of households, interest rates, and people’s existing incomes will all have an impact on housing demand.

Factors influencing home purchases in 2023

The following is a list of the key variables influencing home purchases:

income increase

The Net National Income (NNI) in FY 22–23 was Rs 2.3 crores at constant prices compared to Rs 2 crores in FY 21–22; the 17 percent increase in the NNI shows that living standards have increased for the typical citizen. When adjusted for inflation, per capita income increased by 5.9% to Rs 1.15 lakh in FY 22–23 from Rs 1.09 lakh in FY 20–21. Although a sharper increase in housing costs of at least 8% is to be anticipated, this shouldn’t have an influence on demand because consumers prefer purchasing a home to renting one.

Inflation

However, income is not evenly distribute, and food inflation has a substantial negative impact on the economically poorer portions (below Rs 8 lakh per annum As a result, it is anticipate that as this segment’s investible income declines, demand for inexpensive housing (PMAY developments) will fall dramatically. Larger interest rate hikes might be more readily accept if borrowers prolong the loan’s term rather than raising the EMI.

Subsidies

Due to the extension of the Credit Linked Subsidy Scheme through December 2024, housing demand would increase. With Tier 2 and Tier 3 markets accounting for the majority of this segment’s 41 percent of the Indian residential home loan market, demand is probably going to decline.

Interest expenses

Home loan interest rates will rise as a result of rising repo rates. Resulting in longer loan terms and/or higher EMI payments.

Access to quick credit

Since experts anticipate a 25 bps increase, the interest rates on house loans could also increase when policy repo rates fluctuate. The weighted average lending rate (WALR) for new rupee loans climbed by 24 basis points from 9 percent in January 2023 to 9.24 percent in February 2023, according to the most recent information provided by the RBI. Homebuyers may decide not to purchase brand-new homes as a result of this.

Unemployment

According to CMIE data. India’s unemployment rate will rise to 8.4 percent in March 2023, with rural areas experiencing a disproportionately large increase (7.5 percent). Small farmers and SMEs in India are anticipate to be the most badly hit by inflation and may be force to lay off staff, which would further hurt the housing market. This is true even though some of the statistics may reflect seasonal fluctuations after the planting season.

Norms for redevelopment

In the crowd and expensive Mumbai market, a number of such initiatives have been plan, including increases in the Floor Space Index, plans to club land parcels, the takeover of abandoned slum rehabilitation projects, and the allocation of new lands for housing authorities. Since the approval process for these measures sometimes lasts longer than one financial year. They all have a long-term effect and do not immediately stimulate economic growth. As a result, their short-term effects may be minimal and only apply to a small number of regions.

Fees for registration and stamp duty

Stamp duty and registration fee increases have a significant negative impact on house buyers’ moods. The opposite is also accurate. When stamp duty was reduce by three percent, Mumbai had a record-breaking amount of registrations (270%). Therefore, a state that encourages real estate may always boost house demand by temporarily lowering stamp duty. Should housing demand decline for the reasons mentioned above, the now-famous Mumbai narrative offers some hope.

According to the aforementioned study.  India’s housing demand may remain strong in the near future despite hikes in the repo rate.  All other things being equal. Builders and homebuyers should therefore maintain their bullish sentiment in this industry and enjoy positive returns over the next five years.

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