A combination of government reforms, falling demand, and bad loans is hurting India’s real estate sector. If you live in one of the big cities, or even if you have merely visited any of these big cities, one thing that will leave an impression on you is the sheer volume of construction that is happening.
In a country that is growing as fast as India, this sort of development is of little to no surprise. The real estate market represents insane amounts of money, with Mumbai being the 16th most expensive city in the world for housing. On average, a million dollars will buy you around 95 square meters of luxury property in ‘The Maximum City.’ These vast sums of money come with considerable amounts of risk as well. India is a country that is notorious for its corruption, and this is highly prevalent in the real estate market where 30% of all transactions are made using black money.
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Construction standards and regulations are allegedly routinely ignored, in order to finish projects within the stipulated time frame so as to save on costs. Acquiring permits involves a significant amount of bribery. Conditions for laborers receive negligible attention, and this is just a general overview of the problems within the industry.
HFCs are seeing an increase in bad loans
What has been mentioned in the last few paragraphs refers to the operational side of things from the point of view of the developers. The market has other major issues plaguing it as well, not the least of which are the financing of real estate projects, which is an issue on both sides, i.e developers and buyers
India was recently exposed as the country with the worst record of loan defaulters This can be seen in the housing market as well, primarily in smaller cities and villages where employment is informal and therefore regular salaries for workers are few and far between. Oftentimes, they are unable to pay back their loans. A loan that has been lent out but has not be repaid will fall under the non-performing assets category, and the average gross non-performing assets of housing finance companies are at around 1.2% in India, up from 0.5–0.65% from last year.
One instrument that HFCs use are known as LAP (Lending Against Property), where the collateral used in the loan is the property that the borrower is looking to pay for. The LAP would make sense if the lending is done in small ratios, but many institutions will give out loans that amount to up to 80% of the property value.
The problem here is that the value of the property that is being used as collateral can fall considerably, and when this happens the likelihood of defaulting on the loan increases. LAPs are primarily used by bigger developers for large-scale projects that are not housing, and they account for nearly 40% of all loans handed out by HFCs last year.
Changing winds & reforms
Another problem that has been observed in recent times is the fact Indians don’t seem to be buying houses as much as we used to. Sales have fallen 7% between 2016 and 2017, and unsold inventory across the industry was at 525,000 units as of 2017.
The two main economic reforms that the present government implemented, demonetization and GST, had a huge impact on the real estate industry. As mentioned earlier, 30% of transactions in this industry are done using black money. Demonetization was implemented partly due to the prevalence of black money around the country, but it also had an effect on those loan borrowers in the smaller towns and villages. They found themselves out of a job and out of money and as a result are unable to pay back their loans. GST on the other hand had an effect on the economy as whole, which was also felt by the real estate industry, by affecting both the development and sale of properties, along with the borrower’s ability to repay their loans.
The government has taken some initiative by introducing the Real Estate (Regulation and Development) Act 2016, which was done so primarily to protect the interests of the homebuyers. Under this act, if the builder or developer does not hand over the property on the date mentioned in the agreement, the homebuyer is entitled to a full refund of the amount invested at the point, with interest. If there is a delay, the homebuyer has the right to be compensated for every month of delay along with interest.
A lot of the information available about this market points to the possibility of a bubble, and one that may not be too far away from bursting. We have sky high prices, loan defaulters, and large quantities of unsold houses in spite of there being many people in urban and rural areas who still need of housing. The government has tried to step in, but for the effects of their actions to be felt, we will have to wait for some time.
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