Many factors are at play in the housing market. Interest rates appear to have reached a turning point with State Bank of India raising its minimum home loan rate from 6.70% to 6.95%, while house prices remain stagnant, as Reserve Bank of India data shows. Mint explains.
How have house prices moved over the years?
Housing, which was a red-hot market at the start of the last decade, has progressively lost steam since then. The RBI’s House Price Index (HPI) shows that growth in the sector slowed from 22-23% in FY11 and FY12 to 3.4% in FY19, and 2.8% in FY20. Data for FY21 (the year of the pandemic) is only available till the third quarter, but it shows that there has been near zero growth. Buying a house as an investment has always been a high-risk proposition, but this has increasingly failed to pay off in recent years. The rental yield in India (rent as a percentage of the house price) also tends to be low — around 2-3% in large cities.
How have taxes and other costs changed?
States such as Maharashtra slashed stamp duties in FY21 to stimulate the housing market. The stamp duty cut expired on 31 March 2021. However, Maharashtra has kept its circle rates, which are called ready reckoner rates, unchanged for FY22. This is both an acknowledgement of the stagnant housing market and an indirect attempt to stimulate the market. Transactions that take place below the circle rate attract both stamp duty and income tax according to the circle rate. Keeping circle rates low acts as a positive force on transaction volumes. Thus, transaction costs have been lowered to some extent
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What happened with home loan rates?
The RBI has over the past year cut interest rates, which now stand at historic lows. This has brought home loan rates down to as low as 6-7% in some banks. However, bond yields in the US have hardened and inflation remains a serious threat in India. SBI has hiked its minimum home loan rate. Deposit rates have also started inching up.
Is housing a good investment?
Assume that housing has a rental yield of 2% and a house price growth of 6% every year. Let’s say that the costs associated with it, such as maintenance and property tax, amount to 0.5% of the price each year. Your net return thus comes to 7.5%. If this exceeds an equally risky alternative (equity markets or gold), housing becomes the investment of choice. However, housing also comes with risks such as title disputes and tenant eviction problems. For retail investors, experts suggest buying a house to live in, but not to invest in.
What are the alternatives?
You can invest in real estate through Real Estate Investment Trusts (REITs), though REITs can invest in commercial property and not residential property. They are required to distribute 90% of their cash flows to investors. Units of REITs can be purchased and sold on stock exchanges. Stocks of companies linked to the housing market can give you indirect exposure to housing. A house is a large lumpsum investment, less diversified than units of a REIT or a portfolio of stocks, a point you should consider.
