India’s house prices are now falling!
Last Updated: August 03, 2014
Residential property prices are now falling in most cities in real terms (given India’s high inflation, it is important to distinguish nominal price rises from real price rises).
Nominal house prices rose in 13 cities (out of the 26 cities covered by National Housing Bank (NHB) Residex figures) during the year to Q1 2014, while the remaining 13 cities have seen their nominal house prices fall. But when adjusted for inflation, house prices actually fell in 21 cities, whereas only 5 cities experienced price increases.
In New Delhi, house prices fell by 1.49% during the year to end-Q1 2014. When adjusted for inflation, house prices in the capital city actually dropped 7.82% over the same period. During the latest quarter, house prices increased 1.53% (2.81% in real terms).
The highest annual house price increase was in Surat at around 17.86% (10.28% in real terms) y-o-y to Q1 2014. It was followed by Chennai, which had a 12.58% price increase (5.34% in real terms), and Nagpur, which had a 10.43% price rise (3.33% in real terms).
Meerut registered the largest price drop in Q1 2014, plunging by 13.61% (-19.17% in real terms). It was closely followed by Ludhiana with a 13.17% drop (-18.76% in real terms) and Vijayawada with a 13.04% drop (-18.63% in real terms). Other struggling Indian cities include Jaipur (-9.82% nominal, or -15.62% in real terms), Coimbatore (-7.61% nominal, or -13.55% in real terms), Indore (-7.18% nominal, or -13.15% in real terms), Chandigarh (-5.67% nominal, or -11.74% in real terms) and Kochi (-4.49% nominal, or -10.64% in real terms).
Despite this, the Indian property market is expected to experience a post-election boost. Newly-elected Indian Prime Minister Narendra Modi is expected to revive the slowing economy and the struggling property market.
Local real estate experts are optimistic on the future of the Indian property market:
- "We have a huge expectation from the new government as Modiji has demonstrated good governance in Gujarat. We expect efficiency in approval process and easier bank funding which are the two major concerns for the industry," said Lalit Jain of realtors apex body CREDAI.
- "The formation of a stable government not dependent on coalition partners will hopefully mean faster decision making and economic reforms. If GDP growth picks up, one of the early beneficiaries would be the real estate industry," said Anshuman Magazine of CBRE South Asia.
- "We are optimistic about the reform and changes this government will bring in to boost the economy. For the real estate in particular, we firmly believe that the sector will be given industry status this time which will ease all fund inflow," said Parsvnath Chairman Pradeep Jain.
India’s economic growth was 4.6% in the first quarter of 2014, after 4.6% in Q4 2013, 5.2% in Q3 and 4.7% in Q2, according to the Ministry of Statistics and Programme Implementation.
The economy is expected to expand by 5.4% in 2014.
Previous annual GDP growth rates were 4.4% in 2013, 4.7% in 2012, 6.6% in 2011, and 10.3% in 2010, based on figures from the International Monetary Fund (IMF). Real estate prices in India (as elsewhere) tend to be strongly boosted by high GDP growth, which puts money in buyers’ pockets. Along with interest rates, GDP growth is more important than any other factor for property prices.
India's residential property yields at an all-time low
South Mumbai has very low rental yields, with property investors earning 2.20% gross, even lower this year than last. Apartments remain expensive. In US$ terms they are less expensive this year than last, reaching about US$10,900 per square metre (sq.m.) for 120 sq.m. apartments.
In New Delhi, prices per sq. m. are of course much lower, despite the continuous price rises in that city. In 2015, the price per sq. m. of a 120-sq.m. apartment in New Delhi was around US$3,015. Rental yields in Delhi remain very poor, at between 1.92% to 2.05%. The last year we saw good rental yields in New Delhi was 2007.
In Bangalore, prices are around US$678 to US$1,272 per sq. m. Rental yields are higher in Bangalore, ranging from 3.7% to 4.4%. Again, this is a long way below the nice yields of 7.16% to 9.92% which could be obtained way back in the year 2007.
Conclusion: Indian gross rental yields are very low. This suggests that Indian residential property is somewhat overvalued. While low rental yields do not always indicate over-valuation, especially in periods when interest rates are low, they are only justified if rapid economic growth is expected. The buyer must ask himself whether there is such an expectation in India, and whether it is really justified.
Round trip transaction costs are moderate to high in India. See our Property transaction costs analysis for India and Property transaction costs in India, compared to the rest of Asia
Rental income tax is low to high in India
Rental Income: Net rental income is taxed at progressive rates, from 20% to 30%.
Capital Gains: Capital gains are taxed at the standard income tax rates.
Inheritance: No inheritance or gift tax is levied in India. But a wealth tax of 1% is imposed if the net wealth exceeds INR10 million (US$161,342).
Residents: Residents of India are subject to tax on their worldwide income at progressive rates, from 10% to 30%.
Buying costs in India range from low to high
Total roundtrip transaction costs, i.e., the cost of buying and selling a property, are between 8.75% and 15%. Stamp duties and registration fees vary according to city and locality.
Pro-tenant laws in India often inhibit rental market
Indian law is pro-tenant.
Rent Control: For Delhi, the maximum annual rent is 10% of the cost of construction and the market price of the land. But both construction cost and land price are based on historical values, not on the property's current market value.
Tenant Security: It is difficult for a landlord to protect his property from unwanted overstaying tenants. Though contracts may be enforceable in the courts, the enforcement process is likely to take years, or even decades.
India: stronger economic growth expected, rupee continues to depreciateAfter two years of below 5% growth (4.4% in 2013 and 4.7% in 2012), the Indian economy is expected to grow more strongly for the remainder of 2014, with the International Monetary Fund (IMF) forecasting a full-year GDP growth rate of 5.4%. India’s economy expanded by 4.6% in the first quarter of 2014, according to the Ministry of Statistics and Programme Implementation.
High inflation is one of India’s major problems, standing at 8.28% in May 2014. Inflation is expected to slow slightly to 8% this year, after average annual inflation of 10.3% from 2008 to 2013, according to the IMF.
In June 2014, the Reserve Bank of India (RBI) kept its key interest rate unchanged at 8%. The RBI is expected to keep the key rate on hold at the third consecutive meeting in August 2014, according to HSBC.
The Indian rupee (INR) continues to slide, following two years of sharp depreciation. In July 31, 2014, the rupee depreciated to a three-month low of INR60.55 against the U.S. dollar, on capital outflows after the US Fed trimmed its monthly bond buying programme by another US$10 billion by end-July 2014. Moreover, high demand for the U.S. dollar from importers and the weakness in local equities also pulled the Indian rupee down against the U.S. dollar.
In defending the country’s currency, the RBI spent around US$ 17.23 billion worth of foreign exchange reserves during 2013, leaving the reserves at around US$274.81 billion. Planning Commission Deputy Chairperson Montek Singh Ahluwalia assures public that India has adequate foreign exchange reserves.
Modi brings hope
Right after Narendra Modi’s election victory, there was widespread optimism about India’s economy and employment outlook. Modi has pledged to reduce inflation and eradicate corruption. The new PM also vowed to step up investment and clear regulatory hurdles for businesses.
Modi also pledged to reduce India’s fiscal deficit to 4.1% of GDP this year, from 4.5% in 2013 and 4.9% in 2012.
"After two consecutive years of sub-5% growth, the change in government is significant given the [Bharatiya Janata Party] BJP's economic emphasis, stability in composition and decisive governing structure," said Rohini Malkani of Citigroup India.