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BT Buzz: Buying a dream home? COVID-19 can help you save lakhs on EMIs

In a weak demand and oversupply scenario, the prices have indeed come down, especially in metro cities; but waiting for further decline might prove counterproductive

Aprajita Sharma June 25, 2020 | Updated 19:58 IST
BT Buzz: Buying a dream home? COVID-19 can help you save lakhs on EMIs
If you are in the pink of your financial health and without the fear of job loss, buying a house now could be a prudent step

After gold, if there is another asset class that holds emotional value for Indians, it is a house. Be it for investment or end-use, most Indians wait for an opportune time to buy a residential property. The coronavirus pandemic has given them one. Not only have the prices gone down across cities, home loan rates are also at historic lows. With the halt in construction activities due to the lockdown and reverse labour migration, you never know when the recovery will happen. We give you a deep dive into residential property market before you jump into it:

Residential market post COVID-19

The residential segment had started showing signs of recovery with marginal improvement in sales volume in 2019. However, the outbreak of COVID-19 halted the expected growth trajectory for 2020. "Job insecurities and pay cuts have affected home buyer sentiment leading to falling home sales inventory which coupled with rising input costs has dented developer margins. The consolidation trend is expected to continue in the sector and move towards formalisation on the supply side," says Gulam Zia, Executive Director, Knight Frank.

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In a weak demand and oversupply scenario, the prices have indeed corrected, especially in metro cities. "Low and mid-sized segments will be the hardest hit. Prime residential market of Mumbai is expected to see a price fall of 5 per cent in 2020 and witness a price decline of 3 per cent in 2021," Zia says.

There are some who believe the prices may fall even further due to lack of demand and expected delays in project completion due to lockdown and shortage of labour. "The migrants opting to move back to their respective states will make the real estate industry grapple with an acute shortage of labor. There will be an inevitable delay in construction activity with timelines getting stretched by nine to 12 months," Zia says.

Should you wait or buy now?

ANAROCK research reveals residential sales in the June quarter plummeted by 81 per cent on yearly basis in top seven cities. So, demand is indeed low and inventory pile-up is almost certain. However, it doesn't mean that you wait for more price correction. A consumer survey by ANAROCK conducted during lockdown period says 72 per cent buyers still prefer to buy a property, out of which 44 per cent have not changed their plans. Interestingly, 12 per cent respondents who were previously not planning to buy, are now interested. In fact, millennials who favoured rental properties before now want to buy a property for end-use.

That said, developers are in fact expecting a demand revival. Anshul Jain, Managing Director-India and South East Asia, Cushman and Wakefield, suggests that fence-sitters should purchase residential properties as it's hard to predict the bottom and waiting for that may not yield significant gains. "Housing prices are currently ruling at lower than 2012 level and there is minimal scope of further correction," he says.

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So, if you are in the pink of your financial health with no job loss insecurity, buying a property could be a prudent step. While prices may fall further, but with the economy starting to limp back to normalcy in few months, the fall may not be significant. "The timing is right because prices are at their lowest best across major markets and one can easily negotiate a good deal from the builders," says Anuj Puri, Chairman - ANAROCK Property Consultants.

If you are worried about project delays, there are some attractive offers by developers that can assuage your concerns. "To overcome issues like inventory pile-up and cost overruns due to corona-infused lockdown, various developers have introduced innovative offers to sell their inventory. Refundable booking amounts, cashback schemes, various freebies on booking a house are some of the popular offers on the table for the discerning homebuyers," Puri says.

Rise of ready-to-move-in houses

If you do not want to risk your money on under-construction properties, you can explore options in ready-to-move-in segment. ANAROCK's consumer survey says more than 46 per cent participants preferred to buy ready homes so that they can avoid the associated construction risks due to COVID-19 outbreak. In the previous survey done in the second half of 2019, this number was just 35 per cent. "There is certainly a growing preference for ready-to-move-in homes as the buyer gets to see what he buys. Also, the narrowing price gap between the two property types coupled with the intention to minimise risks has tilted buyer's preference towards ready properties in past few years," Puri points out.

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He adds that the decision to buy between the two types should depend on factors such as builder type, property location and one's immediate requirement.

Interest rate scenario

The Reserve Bank of India has reduced the repo rate by a cumulative 250 bps, from 6.5 per cent to 4 per cent since February last year. Even as banks have not transmitted the rate cut fully to borrowers, lending rates have still come down drastically. "Currently, some of the lowest interest rates are under 7 per cent, going as low as 6.85 per cent. One year ago, at the start of July, the lowest rates were in the range of 8.55 to 8.75 per cent," says Adil Shetty, Chief Executive Officer at BankBazaar.

Take into account Pradhan Mantri Aawas Yojana that offers interest rate subsidy, the rates could go even lower depending on your income level. "The impact it may have in the reduction of your EMI could vary from a hundred to a couple of thousand rupees per month. This doesn't seem like a lot; however, compounded over the full tenure of the loan, small monthly deductions translate into several lakh rupees," says Shetty.

The government's urban Pradhan Mantri Awas Yojana (PMAY) provides interest subsidy to Middle Income Group (MIG) on the loan amount taken to purchase a home. There are two MIG categories - MIG 1 for those with household income between Rs 6,00,001 and Rs 12 lakh and MIG 2 for those with household income between Rs 12,00,001 lakh and Rs 18 lakh.

MIG 1 category gets an interest subsidy of 4 per cent, on a loan amount of up to Rs 9 lakh, while MIG 2 category gets 3 per cent subsidy on a loan amount of up to Rs 12 lakh. "The applicant can get additional loan, however, the amount beyond the subsidised loan is provided at a non-subsidised rate. For example, assume an applicant of MIG 2 category wants to buy a house costing Rs 40 lakh. After a mandatory down payment of 20 per cent (Rs 8 lakh), the balance 32 lakh can be arranged through the loan. However, a subsidy of 3 per cent will be applicable only up to Rs 12 lakh. In other words, the applicant will have to service the remaining amount (32-12 = Rs 20 lakh) at regular interest rates of the bank, which goes up to 7-8 per cent in the current times. A subsidy of about 5 per cent on Rs 12 lakh amounts to a significant saving for the buyer," explains Maneesh Upadhyaya, Chief Business Officer, 99acres.com.

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As per ANAROCK research, currently more than 15.92 lakh under construction units are available across the top seven cities, of which nearly 40 per cent are in the affordable segment (priced lesser than Rs 40 lakh budget). "Government subsidies will be available for many of these affordable units," says Puri of ANAROCK.

Property as an investment

While this is indeed is an opportune time to buy a property for end-use (if you can afford), purchasing it for investment purpose may not be a great idea. "Prioritise your financial goals before investing in real estate as an asset class. Note that disposing a real estate property during an economic downturn may become very difficult and thereby, may adversely impact price realisations," cautions Sahil Arora - Director & Group Head, Investments, Paisabazaar.com.

So, if you are looking at real estate purely as an investment, you must compare it with other investment options such as equities, gold or fixed income assets which are more transparent and flexible. "These asset classes are much easier to enter and exit, extract a far smaller price, and could be just as rewarding as real estate," points out Shetty of Bankbazaar.com.

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