How
do you reconcile an upbeat assessment of the
Indian residential real estate market by the country’s leading mortgage vendor
(Headline given below) with the dire straits of the real estate market in
India?
Home prices hit
roof, but affordability near its best: HDFC (May 15th, 2015)
screamed the headline in May 2015.
It said
that Housing prices have risen to record high levels, but increase in
disposable income of the homebuyers has made the purchase of a house most
affordable in over a decade, which reflected in its
loan book of about Rs 2.5 lakh crore that grew by 23 per cent in FY15.
To a
distant Martian investor it would seem odd that Indians used their famed frugal
engineering capability to reach Mars and blow off that saving in buying a house
that makes fun of their frugal mindset.
According
to NHB price index data till 2014, home prices in India’s top cities have
increased from 1% to 249% from 2007 to 2014 with Hyderabad being an exception.
Source:Mint
If you
live out 3cities Jaipur, Hyderabad and Bangalore; as outliers the average
minimum increase in metropolitan cities is 50 % (not all cities depicted in
graph) over a 7 year period which gives an average annual increase of 7%. In hot markets like Chennai, Pune,
Mumbai and Ahmedabad the annual price increase has been between 35 %( Chennai)
and 18 %( Mumbai, Pune) over 2007 to 2014.
According
to the HDFC commentary this growth was buoyed by a favorable average home
affordability ratio that is at a decade low despite the surge in home prices. The affordability ratio equals the average property
price divided by the annual income and determines how affordable a housing unit
is for a homebuyer as per his or her income. E.g. if the price of a home
is 50 lakhs and the annual income of a person is 10 lakhs then the
affordability ratio in this case is 5.
According
to HDFC; the affordability ratio in 2014 was 4.4; the lowest in a decade since
2004, when the ratio was 4.3. With all the talk about high home prices the
leading mortgage player presents a view that’s seems contrary to what’s
reported on the ground. Seems odd isn’t it? Let’s dig a bit deeper for some more clarity.
For
arriving at this ratio HDFC uses an average property value of 52 lakhs and an
average annual income of a home buyer at 12 lakhs and that’s how the ratio for
2014 comes at 4.4. The data for average property value and annual income of
home buyer would presumably be from its own customer data.
Can the
figures used to arrive at the ratio be extrapolated to the entire sector? At first glance there would not be any basis
to doubt the average annual income of a home buyer and the average price of a
home used to arrive at the affordability ratio and extrapolate it to the entire
real estate market if you consider the fact that the loan book grew at 23% YoY
and HDFCs dominant position in the mortgage market.
But if
you drill deeper the company mentions that its
average home loan size has grown
to Rs 23.3 lakh, while its loan to value stands at 66 per cent; which means
that the typical HDFC home buyer would be buying a home which is close to 35
lakhs. Wow if we could get a decent home for 35 lakhs in any city the Martians
would be proved wrong isn’t it? And on top of it if the average home buyer
income is 12 lakhs then the affordability ratio would be below 3!! Strange
isn’t it?
Well it may be due to the tyranny of inferring average from a
skewed income data distribution. What this means is that on the denominator of
the ratio a few sample data with large variation from the average (some people
with annual income with more than 1 crore) can distort your average (In this
case 12 lakhs)
To have a loan book with an average ticket size of 35 lakhs
would mean that HDFC is targeting tier 2 and 3 cities, home improvement loans
or balance transfer loans that takes it ticket size down .So on the numerator
front the average home price of 52 lakhs could be understated (or it could be
correct if they use pure home loan disbursement data not improvement or balance
transfer to calculate the average home price)
So the bottom line is that the HDFC data would be
overestimating income data and underestimating home price data.
Let’s look at the average salary data sourced from naukri
http://www.naukrihub.com/top10/highest-average-salary-cities-in-india.html
“As per payscale.com the overall average (yearly) salaries in
Bangalore stands at INR 585,527. Some of the top paid profiles are that of
Project Managers (IT) (INR 1,156,944), Project Managers (Software Development)
(INR 1,211,247), Senior Software Engineer (INR 658,756)
Mumbai: – The average salaries in the city stand
something at around INR 498,475
Pune: The average salary in Pune stands at around INR 530,918
Hyderabad: The overall average pay stands at INR 489,505 “
Broadly the average salary across the country according to
this data is around 5 lakhs.
This data point can also be skewed but when you validate it
with the tax base in India it seems fine. In 2012, out of the 33 million tax payers
only 1.7 million were with an income of over 10 lakh per annum.
Table: Tax
collection by income 2011-12
Slab
|
Number (in lakhs)
|
Percentage of taxpayers
|
Tax collection(Rs. in crore)
|
Percentage of tax collected
|
0-5 lakh
|
288.44
|
89.00%
|
15,010
|
10.10%
|
5-10 lakh
|
17.88
|
5.50%
|
21,976
|
14.80%
|
10-20 lakh
|
13.78
|
4.30%
|
17,858
|
12.10%
|
>20 lakh
|
4.06
|
1.3
|
93,229
|
63.00%
|
More than 17 million people were with an annual income level
in the range of 5-10 lakhs which is close to the figure reported in the naukri survey.
With an annual increase of 10% the figure would be close to 6.5 lakhs.
If we look at this data and calculate the affordability ratio
then it would be close to 10 which does not paint a rosy picture. This
unattractiveness is reflected in the recent commentary on the ground.
According to first post “Delhi's residential real estate
market is staring at a free fall with new launches dropping by a whopping 68
percent in the first half of 2015 and sales down 50 percent in the same period.
The NCR market saw only 11,360 housing units launched in the first half of 2015
compared to 35,500 units launched in the same period last year, according to
data provided by real estate consultancy firm Knight Frank. At the country
level the number of unsold inventory homes stood at 7 lakh units which would
take over 3 years to sell.
There were also no new launches in the premium category,
priced above Rs 3 crore. Demand for properties prices above Rs 3 crore each
have dropped from 918 units in the first half of 2013 to 215 in the first half
of 2015, indicative of overall market sentiment, the report said.
The table below clearly shows that new launches in NCR have
hit an all-time low. Most of the launches this year have been in Gurgaon and 43
percent of such launches were fuelled by
units launched under the Haryana government’s Affordable Housing Policy 2013.
Most of these houses were priced at less than Rs 25 lakh”.
As our analysis above shows its no surprise that most of the
launches in Haryana was at 25 lakhs that’s the price point at which
affordability ratio for the tax payers
would be at 4
The home prices for long have
been bolstered by the investors who have formed a major portion of the housing
market. In fact in markets as Noida and NCR the share of investors are close to
70%. These prices were apparently bolstered by expectation of turnaround in the
business cycle, reforms and the promise of new jobs and low interest rates
which would increase personal incomes and improve the affordability ratio.
Unfortunately that’s not how
things are unfolding in the real economy. If we look back at the growth of the
real estate market in India the big bump happened post 2003; led by the engines
of increase in income and job creation.
To
understand the income growth it would be interesting to look at the job market
in the 1990s.Most of the home buyer segment were employees of the generation
who had come to the great metro cities in the 1950-60s and most of them were
working in central /state government and some in private companies.
A
majority of these employees stayed in government owned housing colonies and
were close to retirement. That was the time the 5th pay commission
was just implemented in 1996 and the arrears were paid in the following years
.The boost in income levels of these government workers close to their
retirement period created a strong foundation for genuine buyers in the market
who were close to retirement and needed to own a house post retirement.
On top
of this there was a job creation dynamic in the private sector (majorly IT&
ITES) at work that would work in favor of the real estate by boosting
disposable incomes disproportionately with respect to the annual income levels
of these employees. The way it worked was interesting
Most of
the people who entered the ITES and other industry workforce in 1997-04 lived
with their parents who were working in the government (and beneficiaries of the
pay commission); didn’t have to support their education with an education loan;
and as a result had a lot of disposable income.
The IT
& ITES had created close to 8 lakh jobs by 2004 from 3 lakh in 2000.Now
purely from a demand and income perspective these 3 lakh odd new employees in
year 2000 with an annual salary of close to 2 lakhs would have got a salary in
the range of 3- 4 lakhs in 2004; assuming a salary hike of 20% per annum which
was the norm in the early phase of the IT boom. In 2004 the average home prices
was around 15 lakhs which made the affordability ratio less than 4 for the IT
employees. So from 2004 close to 3 lakh people were potential customers from
jus the ITES segment (assuming people who had entered in 2000 would have the
income to buy a house by 2004 due to increase in income) .To put it in
perspective the number of new residential units added across the country in
2014 is estimated at 2.5 lakhs. The Icing on the cake was low inflationary
environments which lead to a low interest rate scenario with banks’ lending
close to 100% of the property value in some cases.
As the
IT & ITES expanded it added close to 250,000 jobs annually from 2004 to
2010 with the total IT & ITES employee base at 2.3 Mn in 2010.
Year
|
Total IT & ITES employees
|
Incremental Additions
|
2000
|
284,000
|
|
2001
|
430,100
|
146,100
|
2002
|
522,200
|
92,100
|
2003
|
670,000
|
147,800
|
2004
|
833,000
|
163,000
|
2005
|
1,058,000
|
225,000
|
2006
|
1,293,000
|
235,000
|
2007
|
1,621,000
|
328,000
|
2008
|
2,010,000
|
389,000
|
2009
|
2,236,614
|
226,614
|
2010
|
2,300,000
|
63,386
|
2011
|
2,540,000
|
240,000
|
2012
|
2,775,000
|
235,000
|
2013
|
2,966,000
|
191,000
|
2014
|
3,132,000
|
166,000
|
During
2004 to 2010 the IT industry also witnessed an average pay increase close to
15% per annum thus boosting the income levels. Post the 2008 market crash the
real estate market witnessed some correction but the Income levels also got a
boost due to the implementation of the 6th pay commission in August
2008.
Source: Institute
of actuaries India
From
2010 the real estate price kept on increasing by close to15 % per annum in
major markets. Income growth couldn’t keep pace with it. The high inflationary
environment from 2010 to 2014 was a double whammy as it took a toll on the
disposable incomes and increased the interest rates.
Source: Institute
of actuaries India
The main engines of
high paying jobs; the IT sector started sputtering with the average annual employee
additions falling close to 2 lakhs from 2010 -14. On top of this the average
annual salary for fresher’s plateaued during the period 2010-14 to 3 lakhs. The
attractive salary increments couldn’t keep pace with the inflation; and in
effect the employees witnessed a shrinking in their real incomes during 2010-14.
The real estate
price index was indifferent to the macro headwinds of inflation and high interest
rates till 2014 which was hampering the demand .It was boosted by positive
sentiment on the back of the new government’s promise of reform and job growth.
The sentiment was driven largely since the real estate market in India is primarily
funded by investors(black money being a major component) who have not witnessed
a major correction in real estate since
2002.
Current activity on
the ground does not indicate any large drivers for job creation and income
growth in the next 3 years. There are no significant job creation engines that
can provide a boost to the real estate market at the current price level. The
jobs being created are in the ecommerce space and largely on the logistics
front which are low paying jobs .Banking, Insurance, retail, media and
infrastructure industries are not currently in a position to create jobs and boost incomes in
the next 3 years. The government can come up with a 7th pay commission
which is due in 2016.Going by prior records ,best to assume that it would be
implemented in 2018 before term of the central government comes to an end in
2019.
What’s the way
ahead for the Sector? Sentiment booster without changes on the ground can’t be
sustained beyond 3-4 years in the absence of buying on the ground by genuine
buyers. Genuine buyers are on strike due to the high prices and low income
growth
Till the income
growth happens then it’s either a time wise or a price correction in the above 80
lakh real estate market.
Real estate players
should shift to the below 50 lakh housing market where our famed frugal
engineering skills should convince the Martian to buy a house in I love my India.
