Introduction:
A JLL India analysis predicts housing affordability will improve in 2024 on the back of 60-80 basis points of repo rate cuts. This should sustain buyer demand and the real estate sector’s growth momentum.
Analysis for a Layman:
The repo rate is the key interest rate set by the central bank, RBI, that impacts all lending rates. Over 2022 and early 2023, aggressive repo rate hikes of 250 basis points made home loans costlier, denting buyers’ affordability.
But with inflation easing and the economy steadying, RBI is expected to cut the repo rate by 60-80 basis points through 2024. This will make home loans cheaper. In turn, more people can afford to buy homes at current property prices. Improved affordability coupled with factors like job stability and income growth should spur housing sales next year.
Original Analysis:
The analysis signals that RBI’s prolonged pause on rate hikes has set the stage for cuts in 2024 as inflation continues easing. This presents a positive environment for both homebuyers and developers. Cheaper loans can attract fence-sitters while sustaining demand from end-users, preventing price corrections. Stable sales will aid cash flows for builders sitting on high inventory piles. This vindicates developers who resisted knee-jerk discounts.
However, higher construction costs pose risks amid rising commodity prices. Labour shortages and supply disruptions also loom given China’s COVID flare-ups. Unless input costs moderate, higher interest savings may only protect margins rather than boost affordability per se. Developers must thus focus both on balance sheet health and project execution capabilities.
Impact on Retail Investors:
For retail investors, improving affordability and sustaining housing sales present a bullish scenario for real estate stocks after the consolidation of 2022. Many quality players trade at reasonable valuations currently. Investors should assess inventory quality, financial stability, and delivery track records of developers rather than just top-line growth when picking potential outperformers as the cycle matures.
Impact on Industries:
The positive outlook predominantly benefits residential developers in the affordable and mid-segments set to tap wider demand. Related sectors like building materials, furniture, home loan providers also gain. Infra push in Budget 2023 further helps commercial real estate sentiment while IT/ITeS office space requirements remain stable given global tech spend. However, investors may possibly rotate some portfolio exposure back to interest-rate sensitive auto and banking names.
Potential Gainers:
- Bajaj Finance, HDFC: Cheaper home loans to drive mortgage volumes
- Kajaria Ceramics, APL Apollo: Real estate growth aids building materials
- Godrej Properties, Oberoi Realty: High-quality developers to see demand growth
Potential Losers:
- Infosys, HCL Tech: Investors may book profits to redeploy into real estate
Conclusion:
Projections of higher affordability indicate India’s real estate sector could be poised for a bull run through 2024. But developers need to get project execution right to capitalize given macro risks from inflation and higher costs. Investors should pick stable, trusted brands with lighter balance sheets and solid visibility on collections.
Citation: ET Real Estate. “‘Housing Affordability may Improve Next Yr’.” The Economic Times, 11 Dec