Economic Survey Bats for Home Buyers, Says Prices Must be Lowered to Clear Inventory

New Delhi: Housing prices remain elevated and real estate developers should cut them down to clear unsold inventory, according to the Economic Survey 2020.

"Housing prices have remained elevated even though growth in prices has fallen sharply since Q1 of 2015-16 and remained muted since then. As at the end of December 2018, about 9.43 lakh units worth Rs 7.77 lakh crore with 41 months of inventory are stuck in various stages of the project cycle across top eight cities," said the report tabled in the Parliament on Friday.

"The existing unsold housing inventory can be cleared and the balance sheets of both bank/non-bank lenders cleaned if the real estate developers are willing to take a ‘hair-cut’ by allowing the house-prices to drop," it said.

The decline in household investment in 'Dwellings, other buildings and Structures', over 2011-12 to 2017-18 is a reflection of slower growth in purchase of houses by households.

"The real estate sector, and residential property, in particular, has been reeling with issues of delayed project deliveries and stalled projects leading to a build-up of unsold inventory over the years," it said.

The government’s thrust on affordable housing is evident in order to boost the real estate sector and, consequently, the construction activity in the country.

Higher investment in housing by households may increase the fixed investment in the economy, it said.

'Severe' stress implies that there has been high leveraging by developers who have either limited or extremely poor visibility of debt servicing due to various factors. If residential sales pick up, such developers would be in a better position to service their loan amount, thus benefiting both banks and NBFCs.

Overall, the sentiment is also low because the high unsold inventory reduces buyer confidence, and because too many projects do not meet existing demand in terms of locations and sizes. Also, prospective buyers currently lack overall financial confidence to make such significant and protracted financial commitments.