A Rising Force on Icarus Dreams
Outlook Money|July 2021
Just when real estate appeared to be emerging from the chaos of the first wave, the second wave dealt a crippling blow that will need urgent policy interventions
Vishav

Just a few months back, the nation appeared to have overcome the Covid crisis that began in early 2020, and was coming out stronger, with the number of active as well as new cases at their lowest levels in several months, and with the economy gradually emerging from lockdown. Then, seemingly out of nowhere, the second wave of the pandemic struck the country, with over four lakh daily cases reported every single day at its peak.

A similar story played out simultaneously in the real estate sector, where, at the beginning of this year, it seemed the worst was over and green shoots of revival were visible. The confidence in the sector was even stronger, considering it was one which did not suffer as much as the rest of the economy during the first wave. It was thus unanticipated that within a few months, real estate would again be staring at a major crisis. However, that is exactly where it finds itself now.

That the sector is grappling with a longer term crisis, also means there are a lot of opportunities for buyers in the market. Prices of homes have either remained constant or have seen marginal cuts, mainly due to lack of demand and huge supply of unsold inventory. To revive the ailing sector and boost demand for homes, the government has also taken a slew of policy measures over the years to make home-buying a more attractive financial decision. This means there are ample tax benefits available when one decides to purchase a home. To add to that, many states have cut stamp duty and have even allowed builders to sell houses at a price much below circle rates. Interest rates on home loans are also at a record low, with Reserve Bank of India opting to keep the rates unchanged in June as well, while also maintaining an accommodative policy stance, to keep room for further rate cuts going forward.

Taking all these circumstances together, one can conclude that we have a sort of buyers’ market right now, with most market conditions favourable to those who decide to buy a home at this time. However, the second pandemic wave has brought fresh headwinds which need to be taken into account. The recent inflation data is not very promising. The Consumer Price Index has surged to a sixmonth-high in May, with a sharp rise from 4.23 per cent to 6.3 per cent, outside the RBI’s comfort zone of 2-6 per cent. Meanwhile, the Wholesale Price Index showed inflation of almost 13 per cent in May, the highest in the current series. With inflation on a rise, RBI may not have room to keep policy rates at current levels for very long, so there might soon be a rate hike if inflation is not tamed. What this means is that while interest rates on loans are low right now, there is a possibility of an upward revision going forward, given the inflationary forces at play.

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