Looking for value housing? Buy in a locality where rental yield exceeds 3%

After three years of price rise, some areas may be growing overheated; proceed with caution

Housing prices rose 10 per cent year-on-year on average across the country’s top eight cities in the first quarter of 2024, according to a recent report from Credai, Colliers, and Liases Foras. While cities like Bengaluru, Delhi National Capital Region (NCR), Ahmedabad, and Pune registered double-digit growth, the price growth was in single digit in Hyderabad, Kolkata, Mumbai Metropolitan Region (MMR) and Chennai. Experts say buyers who procrastinate amid this steady rise in prices may be compelled to buy at higher prices later.

Strong demand

The current rise in prices may be attributed to overall rise in demand and an increase in the prices of construction raw materials, according to Anuj Puri, chairman, Anarock Group.

The real estate market is witnessing a cyclical uptick. “From 2015 to 2022 property prices saw a time correction. During Covid, there was also a price correction. Meanwhile incomes continued to grow, resulting in improved affordability and a turnaround,” says Pankaj Kapoor, founder and managing director, Liases Foras.  

Home loan rates have remained steady between 8 and 9 per cent for the past several quarters as the Reserve Bank of India (RBI) has left the repo rate unchanged. “The stability in home loan rates means buyers have reasonable visibility regarding their EMIs,” says Vimal Nadar, senior director and head of research, Colliers India.

Infrastructure growth (like highways, roads, and metro rail) is supporting the housing market with many previously far-flung areas turning into viable destinations.

The establishment of the Real Estate Regulatory Authority (Rera) in 2016 has forced developers to complete their projects on time. “In 2023, a large stock of ready-to-move-in (RMVI) apartments, preferred by buyers, became available, which provided them with the motivation to purchase,” says Ritesh Mehta, head-west & north, residential services, JLL.

Many people who made gains in the capital market in the recent bull run are also investing in real estate.

Price rise may continue

Experts believe the price rise may continue in 2024. “We expect prices to grow by 8-10 per cent or more across the top seven cities in 2024, provided there are no major global headwinds, including geopolitical tensions, job cuts, and so on,” says Puri.

Real estate cycles tend to be long. “The upcycle could last for six to eight years. Currently, we are only in the third year,” says Mehta.

According to Kapoor, the rate of price growth will vary across cities. In the NCR, where supply is much lower than demand, prices may rise by 10 to 15 per cent. But in Mumbai and Pune, where supply has been robust, they may rise by only 5 to 7 per cent. In Bengaluru, too, he expects prices to grow between 5 and 10 per cent.

Affordability issues

After the continuous price rise since the second quarter of 2021, is housing becoming unaffordable?

Experts say affordability remains comfortable at the aggregate level. “Demand continues to grow at the overall level, indicating there is sufficient purchasing power,” says Nadar. He, however, concedes that prices could be a matter of concern in some micro markets.

The Hyderabad market, for instance, could be overheated. “It has witnessed the highest price rise in the past 10 years. Most of the supply is skewed towards the premium segment. These are signs the market may be turning unfavourable,” says Kapoor.

Another region, where prices may have risen too high, is the NCR. “Some pockets of Gurugram and Noida have turned very expensive. One reason is that very little new supply is coming in. Speculation is also at play with those having the supply exploiting the situation,” says Kapoor.

After Covid, the acquisition cost of properties had gone down substantially due to low home loan rates, stamp duty cuts, and developer discounts and offers. “Now with these offers and cuts expiring, MMR, for instance, has again turned expensive,” says Puri.

Ahmedabad, Pune, and Kolkata and many tier II cities continue to be affordable, according to Mehta.

Time to get value conscious

With the economy growing at a healthy pace, pay cheques have been rising. A large number of people believe their jobs are stable and their income can only go up. Prices within the real estate market are expected to reflect this buoyancy.

The repo rate has been steady. “In the second half of the year, home loan rates could moderate provided inflation remains in check and the RBI cuts the repo rate,” says Nadar. This could provide a fillip to demand.

Fence sitting may not be in the buyer’s interest. “Some buyers believe prices may correct in the future. This is unlikely. Many developers are increasing prices amid strong sales and inflationary trends,”  says Puri. He suggests buying a property now as prices will only head north in the future.

Buyers need to be value conscious in this buoyant market. “Make sure the price of the property you are considering is on a par with the prevailing prices in that micro market. If the seller demands a premium, you must get some additional value for it, such as better amenities,” says Nadar.

Avoid paying the scarcity premium. “Do not pay a higher price just because only one or two apartments are left in a project. Such apartments usually sell at inflated rates. If you wait for a few quarters, fresh supply will come in,” says Mehta.

Finally, as Kapoor suggests, “Buy in a locality where the rental yield is 3 per cent and above. Prices tend to be productive at those levels.”