by Akash Pharande, Managing Director – Pharande Spaces
In a recent report on housing prices in the country’s top cities, real estate consultants PropTiger.com found that average residential real estate price tags rose by 7% in 2022. In Pune, prices rose by 8% when compared to 2021. The consultants correctly attribute the price rise to the increased construction cost and the continuing demand wave, which began after Covid-19 and had been going strong ever since.
The fact that housing prices are rising like this after many years of relatively slow or neutral growth is notable. It means different things to different people – those who have already bought their homes are grateful for having acted in time. Those sitting on the fence feel the heat rising – the time to postpone the decision is running out.
Housing prices tend to increase due to a combination of factors, including inflation, supply and demand dynamics, and the overall state of the economy.
Inflation plays a significant role in driving up housing prices, but what is it exactly? To put it simply, inflation is the overall increase in prices and concurrent decrease in money’s value or purchasing power over time. As inflation rises, the value of the rupee decreases, meaning that people must spend more money to buy the same amount of goods and services.
Like everything else, the cost of building materials, construction labour, and other expenses associated with housing construction also rise. In a slow housing market, developers will try to safeguard their customers from this increased cost as much as possible since demand would ebb otherwise. However, they can only do it for so long – and when housing demand is healthy, there is no reason not to pass on the increased costs to homebuyers in the form of higher prices.
Demand and supply
The dynamics of supply and demand also contribute to increasing housing prices. When there is more housing demand than supply, prices tend to rise. This can happen for several reasons. For example, if there is a growing population or a large influx of people into a specific area, there will be more demand for housing in that area, but the supply of housing may not be able to keep up. At a more micro-level, a well-known builder’s project may sell so well that there is more demand than supply. This leads to higher prices for the available homes.
There is another angle to the supply-demand argument – namely, that if interest rates are attractively low and it is easier for people to obtain home loans, more people can afford to buy homes, increasing demand and driving up prices. Interestingly, while home loan interest rates are increasing in India, this has not dampened housing demand by much.
Indians are still gung-ho about buying homes because they know that property prices are rising even faster than interest rates. In India, buying a home is one of the top-most priorities for most families. They will wait and watch for a certain amount of time to see if prices and/or interest rates are likely to fall. When they see them rising instead, the homebuyer instinct is activated.
State of the economy
The state of the overall economy can also impact housing prices. When the economy is strong, and people have more money and feel confident in their job security, they are more likely to buy homes, increasing demand and driving up prices. In contrast, when the economy is weak and people are struggling to make ends meet, they may delay buying a home or choose to rent instead, reducing demand and putting downward pressure on housing prices.
The state of the economy does not affect every category of homebuyer equally. In the Indian context, we have seen that luxury housing buyers who come from a place of existing wealth are less impacted by overall economic performance and least affected by interest rate hikes. Middle-class buyers are affected, but as already mentioned, their homebuying decisions are based on more than just how well the economy is doing.
However, there is no doubt that many lower-income Indians who typically buy affordable housing are forced to shelve their plans until the economy picks up, paid employment prospects to improve, or the government rolls out special incentives specifically aimed at helping them realize their homeownership dreams. Conversely, government policies such as tax incentives or subsidies for affordable housing buyers can increase demand and drive up prices.
While housing prices tend to increase over time, the rate of increase can vary significantly depending on various factors. For example, housing prices may be relatively stable in some areas or even decline over time due to a shrinking population or a weak local economy.
With all the action now happening in the Indian housing market, the Indian homeownership mindset now finds the pressure building. Will housing prices eventually edge into complete unaffordability? While interest rates may moderate over time, property prices will not follow suit as demand is high and prices have awakened after several years of stagnation. More than ever before, there may be no time like the present to get off the fence.