Hyderabad's Residential Market's 2020 Conundrum
- September 03, 2024
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Changing your behaviour in the face of changing information is always hard. But when people are doing well, they don't want to change. They choose to ignore the discordant notes and the tunes they are hearing. They feel threatened by bad news and dread the uncertainty of change and the hard work it demands. This tendency makes them passive and rigid at the very moment they should be most active and flexible' (Schawarzman, Stephen - 'What it takes'). The lockdown imposition pushed the residential segment into a state of complete flux and not surprisingly the market remains in denial mode.
" To understand the residential market better, we need to see it from the following perspectives: "
- Price movements (past & future)
- Covid-19 pandemic likely impact
- Do's and Don'ts for today's buyers
Price Movements:
When in doubt the past is good place to start. The residential market movement over the past 10-15 years might help us to understand the future better.
The residential segment in Hyderabad had it's golden period prior to 2008. The office market growth, fuelled the residential segment in 2004-07. At that point in time, it was not uncommon to find, housing loan EMI's equal to or lower than rent generated by residential units. Lot of people used to leverage and pick up multiple residential units.
In 2008-2014 period all market segments in Hyderabad went down, first due to recession and later due to political activity. Generally it is presumed that good office market absorption would result in the revival of the housing market. In case of Hyderabad this never happened post 2014. Office market kept achieving new absorption peaks from April 2014 to March 2020 but this had limited impact on the residential segment. Sales remained sluggish with spurts of average performance once in a while.
Period post demonisation was one of the most challenging times for Hyderabad's residential market. After this lull, sales started had to just look up in 2019 but again slipped by Q12020. On the back of a slow first quarter in 2020, Covid-19 has been a major blow to this segment.
In last 10-12 years basic price quotes of apartments seem to have increased by about 100%. Basically an apartment which was being quoted at Rs. 4000/- psf basic price in 2010, is probably being quoted at Rs. 8000/- psf currently. 90%+ of residential units in Hyderabad are sold basis housing loan leverage with financial institutions providing an average of 75-80% funding. With a buyer servicing a 7.5-9% p.a. interest on their housing loan plus inflation at 4-5% p.a, residential investments have not yielded any returns in the 2010-20 period.
The basic price of a residential apartment is not it's landed price. We need to add taxes, registration and interiors costs to arrive at the final landed cost. All these additional costs are sunk-in costs and when the basic price moves by just about 8-10% p.a., then owners have not gained much. The only way residential investment made sense, during the last 10-12 years, was the interest subvention scheme utilised while filling personal income tax returns.
To share an e.g. a friend bought a 1500 sft apartment in 2008 at a basic price of Rs. 1600/-psf. The landed price including amenities cost, registration, service tax, interiors (Rs. 8-9L considering about 25-30% of the total investment) amounted to a final cost of Rs. 37-38L. Housing loan on this unit was around Rs. 23-24L @ 8-9% p.a. In 10 years, the basic price of this unit moved to about Rs. 2800-2900/- psf. This unit was sold for Rs. 43L in 2018 and the owner ended up paying Rs. 43.5L to the bank. The only solace, if any, was the income tax return breaks on interest payments.
Currently monthly EMI on an housing loan are equivalent of about 2.5-3 months of rent. Financially speaking renting an apartment makes much more sense that owning it. This also holds true from the fact that housing loan is at 7.5-8.5% p.a. currently, but residential rentals returns remain at 1.5-2.5% p.a.
If one is planning to buy an apartment at Rs. 8000/- psf basic price today and if the prices do not move to Rs. 16-18000/- psf by 2030 or earlier, it probably makes less sense to buy. In today's gloomy period this kind of a price movement seems unlikely. Incase the interest subvention scheme is removed over the next couple of years then returns wise residential investments become even more challenging.
Buying an apartment would make financial sense only if one does not leverage more than 40-50% of the landed cost of the unit or one buy's just to satisfy an inert need to own an asset in one's name without considering the financial returns.
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