Factors affecting the real estate demand in India

By Anita Tomer and Priya Chetty on July 21, 2017

The real estate demand in India was subjected to fluctuations since 1991, when economic liberalization took place. The period between 2001 and 2008 saw high growth in the real estate sector while it experience drastic slowdown from 2008 to 2014. At present, this sector is again witnessing decent growth in some parts of the country even after demonetisation.

The demonetisation initiative by the Indian government flushed out most currency present in the system, impacting people’s purchasing power. During 2016, the government also announced other reforms like:

which attracted investors to invest in the real estate (Arora, 2017; Magazine, 2017). As a result the Housing Price Index (HPI) for the third quarter of 2016 increased 2.3% (Sharma, 2017) (Figure 1). Also, the sector is estimated to be valued at US$ 180 billion in 2020 from US$93.8 billion in 2014.  This means the real estate demand is all set to increase. This article will identify main factors that may lead to increase in real estate demand. This includes

  • increased affordability
  • rapid evolution of nuclear families,
  • increasing income,
  • attractive supply rate of dealers,
  • lower interest rates
  • customer’s confidence
  • mortgage availability

(IBEF, 2017).

increase in the real estate demand in India due to various measures taken by the government
Variation in Housing Price Index for India for quarter 2 and quarter 3 2016-17 Source: (Ameer & Suchitra, 2016)

The figure above shows, in terms of the Housing price index, Kanpur city in India has the highest demand for the real estate sector during Q2 and Q3. Similarly, Mumbai, Bengaluru, Ahemdabad, Lucknow, and Kolkata have also shown positive demand after demonetization.

Major factors affecting real estate demand

Demand can be explained as the number of goods and services that a market would choose to buy at the current price. As discussed in the previous article, demand for property is driven by a growing population and increased urbanization. The factors affecting the demand for the real state are discussed below:

The increasing affordability of consumers

Willingness to acquire a property depends mainly on the income of the buyer. In India, the affordability of consumers has risen exponentially since the shift from socialism to a capitalist economy. This is due to the entry of foreign companies which have created more jobs. The affordability has continuously been on an upward trend, creating more demand for housing and commercial property, particularly in cities. In rural areas, however, the demand has not seen the same trend as affordability here has not changed much over the past two decades.

rising income is also one of the reason for increasing real estate demand in India
Increasing per capita income of Indians each year Source: (Ameer & Suchitra, 2016)
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Economic growth

India has recorded high economic growth in the previous year which has led to the increased inflow of foreign investments in its construction sector. The government allowed 100% foreign direct investment in the sector which has contributed to widespread infrastructure development. According to Shanu (2015), gross domestic product (GDP) and inflation too pushed the real estate sector to perform better. Thus, macroeconomic factors have led to an increased demand for real estate in India.

Interest rate

High-interest rates by banks and other financial institutions affect affordability of a property. The lower the interest rates, the higher the real estate demand due to the availability of disposable income. In 2015, the Reserve Bank of India (RBI) announced its decision to reduce repo rate 25bps to 7.75 %. Consequently, all leading banks and NBFCs (Non-Banking Financial Companies) reduced their interest rate on home loans. This has also been a major contributor to increased demand for property (Puri, 2015).

Increasing population and nuclear families

The increasing population of India is another important determinant of the demand for real estate (Bardhan & Kroll, 2007). Bengaluru, Mumbai, Lucknow, and Delhi have become a hub for education and commerce. People migrate to cities every day in search of better opportunities. Increasing the population in any place creates a need for living space. Other related factors such as a rise in nuclear families and the rise in divorce rates also lead to increased demand for property in cities.

Availability of property and property prices

Valuation of a property increases with a drop in the availability of properties in a particular area and vice versa (Money Control, 2017). For instance, Central Chennai is one of the most valued parts of the city due to its prime location. There is a lack of properties available for sale in this location, and thus, demand is high in spite of its steep prices. Alternatively, when a number of units for sale at a location is high and the price is high, the demand is low. Given its high population, India is currently suffering from a shortage of housing (Ameer & Suchitra, 2016).

Consumer’s confidence

Consumer confidence plays an important role in determining the real estate demand. When a consumer shows a willingness in taking a risk by investing in a property, it shows their confidence in the investment.

For example, when banks reduce their interest rates on home loans, consumers express more confidence in repayment and property valuation. This leads to increased demand for real estate in India.

Laws and regulations

Various amendments in the government’s rules and regulations also influence the purchasing and selling rate of real estate property. Favorable amendments such as RERA bill ( 2016) and Modern Tenacy Bill (2015), Good and Services Tax (2017)  are implemented to increase the demand for residential property in India (Arora, 2017; Gupta, 2015; Singh, 2017)

Factors affecting demand for real estate
Factors affecting demand for real estate
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Growth in real estate can help other sectors also

Based on the current scenario, it can be concluded that real estate in India, if regulated properly, can increase its market growth along with the growth of several other sectors. An improvement in the situation of allied industries such as construction, cement, financial services, and retail will lead to increased interest in the property. Moreover, there is a lack of uniformity in the demand trend in rural and urban areas. This is due to the lack of good job opportunities in villages.

Therefore, more needs to be done by the present government apart from introducing attractive housing schemes for rural areas. The absence of favorable government policies, bank’s interest rates, and unfavorable economic conditions may create an adverse effect on its demand. Therefore, these are factors and constraints to the growth of real estate. Supply-side conditions too play a crucial role in the demand for property, as higher the supply, lower the prices.

References

  • Ameer, M., & Suchitra, D. (2016). Curiosity of investors and development of real estate market in India. Anvesha’s International Journal of Research in Regional Studies, 1(4), 48–57.
  • Arora, S. (2017). Real estate – 2016 round up and outlook for 2017.
  • Bardhan, A., & Kroll, C. A. (2007). Globalization and the Real Estate Industry: Issues, Implications, Opportunities. Massachusetts Institute of Technology.
  • Gupta, M. Das. (2015). New law framed to do away with tenancy troubles, rental housing all set to grow.
  • IBEF. (2017). Indian Real Estate Industry Analysis.
  • Magazine, A. (2017). Overview of Indian Real Estate Market.
  • Money Control. (2017). Factors affecting valuation of property in India – Moneycontrol.com.
  • Puri, N. (2015). Impact of interest rate cut on real estate.
  • Shanu. (2015). Impact of Macroeconomic Factors that Affects Real Estate Market in india.
  • Singh, A. R. (2017). Budget 2017: Impact on India’s residential real estate market.
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