Why are people not buying homes?

Reality of Realty: The crisis in the housing sector is at the heart of the larger economic crisis

The Indian economy is facing its worst set of challenges since 1991, consisting of both cyclical and structural issues. Banks, non-banking finance companies and cooperative banks are all reeling under non-performing assets, bank frauds and issues of bank management. Most Indian corporate houses are highly leveraged and many of them unable to repay banks or even sell their assets. They are also faced with a demand slowdown: there are vast inventories of cars and bikes that are sitting unsold for months, hurting the auto sector and therefore a significant part of India’s manufacturing industry and its contribution to GDP; there is also a vast number of apartments in thousands of projects across the country that remain unsold or, in many cases, stalled as project finances have dried up. The micro, small and medium enterprises (MSMEs) were first hit by the blow of demonetisation, then GST, and now by unrealised dues from the big corporates who have taken their services or products.

But the worst signal surely comes from reports that even the uptake of Rs 5 biscuit packets and innerwear clothing has fallen, causing these industries to retrench thousands of workers. Most crucially, the Indian consumer, who had for long helped the economy along with high demand, has started to lose confidence in its future, as is visible from the lack of demand even during the festive season. In turn, the corporates are not investing in new factories and services as they wait for demand to return.

Thus, Indian economic recovery is faced with a chicken-and-egg problem: consumer demand has fallen and won’t go up unless the average Indian sees the government and corporates investing money in the economy and creating well-paying jobs; the corporates, on the other hand, won’t invest money until they are assured of consumer demand and thus return on investment.

At the heart of this crisis in the financial sector and the larger economy is the state of the country’s real estate sector, especially the housing sector. Here’s the chain-link between the real estate sector and the rest of the economy: the fortunes of the real estate sector affect the fortunes of 150 ancillary industries and contributes nearly 6% of the GDP.

When that sector is in trouble, so are banks, NBFCs and cooperative banks (we haven’t yet heard from the housing finance companies) as well as much of the real economy as well – from the steel, cement and transport industries to professional services providers such as carpenters, electricians and plumbers.

The real estate sector, especially the housing sector is in crisis, and the contagion effects on other sectors is only now beginning to become apparent. The virus first vitiates the financial sector, as it has already done, resulting in the collapse of the financial system, which in turn could drag down economic growth by as much as 3%.

The real estate sector’s problems need to be tackled urgently. To be able to do that, we must understand how bad its situation is and why?

Supply-side woes
Inventory issues

The housing sector’s ground reality is scary. New unit launches have shrunk by 45% in the top nine metros during the period July-September 2019 compared to launches in the same period last year – from 61,679 units to 33,883 units. The saga of unsold inventory in completed apartment projects is even worse. The total unsold housing stock in the top nine metros is about eight lakh units, of which four lakh units are in the ‘affordable housing’ segment -- where the apartment costs Rs 45 lakh or less. The ‘great push’ given to affordable housing by the central government does not seem to be working.

More depressing is that some 1.74 lakh apartments are stuck uncompleted in 220 stalled projects in the top seven cities, according to research by ANAROCK Property Consultants. The value of the stalled units is around Rs 2 lakh crore. Most of these projects were launched prior to 2013 and 66% of the stalled units have been sold to prospective buyers who are now in deep financial crisis and in a state of trauma and agony. It may take 40-84 months to liquidate the stock keeping in view the pessimistic buyer sentiment and the serious liquidity crunch faced by the builders.

GST blues

In February, the GST rate for all under-construction houses/apartments was slashed from 12% to 5%, and from 8% to 1% on affordable housing, with effect from April 1. Though a welcome move, it has not pushed up housing sales. Why? The devil is in the detail. The reduction in GST was beset with several riders.

First, the benefit of input tax credit (ITC) given to builders on critical inputs that go into building homes, such as iron and steel, cement, paints, etc., was withdrawn. GST on steel is 18%, that on cement 28% (sin tax?!). Marble, granite, lifts and elevators all are at 28% GST. The move forced builders to hike prices. For the buyer, what the government gave in the form of lower GST rates, it took away by forcing the builder to hike prices.

Second, the definition of affordable housing was expanded and redefined. Apartments costing Rs 45 lakh and less in both metros and non-metros were deemed to be in the ‘affordable’ category. But a cap was introduced on the carpet area for eligibility for the subsidy for such homes -- 90 sqm (968.76 sft) in non-metro cities/towns and 60 sqm (645.84 sft) in metros.

The double ceiling – price and carpet area – turned out to be a case of burning the candle from both ends. Such a cap on both price and carpet area is impractical in metros like Mumbai, Delhi NCR and Bengaluru, again hurting home sales.

This was compounded by another anomaly under the Prime Minister Awaz Yojana (PMAY)/Cash Linked Subsidy Scheme (CLSS). Under this scheme, the carpet area cap for middle-income groups MIG-1 and MIG-2 category was set at 90 sqm and 110 sqm, respectively. This is further relaxed to 160 sqm and 200 sqm, respectively, for housing in 4,041 notified towns.

Again, a good incentive. But it put the builders in a quandary over whether to build affordable homes within 60/90 sqm and costing less than Rs 45 lakh to get the 1% GST rate benefit or to forego that benefit by stretching the carpet area ceiling to fit the PMAY/CLSS criteria.

Demand Drag

The Narendra Modi government has in the last five years sought to give the affordable housing segment an impetus with a slew of incentives to the buyer. Yet, people are not exactly queuing up to buy homes.

PMAY/CLSS

Under the PMAY/CLSS schemes, people from the Economically Weaker Sections (EWS), Low Income Groups (LIG) and Middle Income Groups 1 and 2 (MIG) get direct subsidy transfer ranging from Rs 2.2 lakh to Rs 2.7 lakh. The income level for eligibility for the subsidy has been raised to Rs 3 lakh per annum (for EWS) and Rs 6 lakh for the LIG. But the drawback in this well-intended scheme is the condition that the ‘applicant family’ should not own any pucca house in any part of India. For the purpose of subsidy under CLSS, the ‘family’ consists of husband, wife and unmarried children. This is not serving the desired purpose as in many cases that have come to light during audit and scrutiny, the subsidies have been claimed with false declarations, and payments on such claims are liable to be revoked.

Secondly, in December 2018, the government announced that no GST would be charged on sale of flats for which completion certificate has been issued. While it is an incentive for buyers of such flats, the policy left under-construction apartments with no buyers despite the other subsidies and income tax sops given for them.

Subvention schemes banned

In difficult times, builders tend to promote interest subvention schemes to attract buyers. The schemes, popularly known as ‘10/90 or 5/95’, under which the buyers have to pay only 10% or 5%, respectively, of the apartment cost, while the balance would come from housing loans, interest on which is serviced by the builder until the handover of the apartment.

In July, however, the National Housing Board moved to ban these schemes, asking housing finance corporations (HFCs) and banks not to lend under such schemes as a few unscrupulous builders were misusing them.

This has affected both demand and sales, especially in this festival season of Dasara and Deepavali when builders usually offered this ‘bonanza’ to push sales.

Given all these factors, home-buyers’ sentiments are at the lowest. They have adopted a wait-and-watch approach as they expect steep price corrections to the extent of 20-30%.

Moreover, those who want to avail housing loans are in a state of confusion as interest rates charged by banks from October 1 are now linked to the RBI’s repo rate, which means their rates will be lower than the rates charged by HFCs and NBFCs. To add to the confusion, borrowers are also waiting for further reduction in the repo rate and hence deferring taking loans.

What must be done

The real estate crisis is serious, and the unsold housing stock amounts to a staggering 4% of GDP. The central government must get pragmatic and remove the impractical riders in the PMAY/CLSS scheme, set right the GST issues, ensure that RERA functions in all states, accord income tax benefits/rebates so that money is available with individuals to push consumption, undertake drastic land and labour reforms, promote 100% FDI in real estate, tweak provisions to make REITs more attractive, accord infrastructure status to the entire real estate sector, make land parcels available at reasonable rates to builders within cities to make affordable housing a success, provide a special distress fund to builders whose projects are stuck without riders attached, and open a single window approval process for builders to prevent undue delay and red tape.

If these measures are not put in place urgently, it is quite possible that the real estate sector will collapse in 2020, in turn putting the entire banking sector, the financial system and the economy in deep peril.

(The writer is a former banker)