The real estate sector has been experiencing a golden period over the last few quarters with many developers reporting multiyear high sale bookings and collection levels. Pick-up in demand has been a respite for the sector which witnessed a paradigm shift in the way it operated starting first with demonetisation (2016) followed by introduction of new policy frameworks (read RERA and GST!). 

Strong demand sentiment, measured as mortgage loan approvals and disbursements, led to c.45%-48% growth in individual loan approvals and loan disbursement over Apr-Dec’21 period at HDFC Limited, one of India’s largest mortgage financiers. Further reflecting the buoyant pulse of the residential market, the sale bookings improved by 75% in H1 FY2022 to c.150 mn sq. ft. compared to 85 mn sq. ft. over the same period a year ago while being in-line with H2 FY2021 (147 mn sq. ft.). Subsequent pick-up in sales momentum in the backdrop of calibrated new launches by developers has led to improvement in the operational health of the sector marked by reduction in inventory overhang. As per one of the leading Indian rating agencies, year-to-sell (YTS) ratio for the existing available inventory declined to 3.9 years in Q1FY2022 to 3.3 years at the end of Q2FY2022. 

Graph 1 Will The Real Estate Demand Momentum Sustain in FY23?

Source: ICRA Research

The Interesting Case  of Improved Affordability

Despite the economic slowdown as well as job insecurity caused at the start of pandemic, many home buyers took a serious-minded view towards home purchase which was driven by hybrid working model as well as sense of security which ownership of a house offers. Subsequent pick up in hiring, especially within IT/ITES, and vibrant start-up environment has bolstered the resolve of many prospective home buyers to take the plunge recently, including the fence sitters. 

Interestingly a bouquet of factors has underpinned the demand growth. Affordability level is at its best currently (2021: 3.2x) when compared to over the last two-and-half decades (1996: 15.6x). While property costs have remained stable in the last few years, it is reduction in borrowing costs on account of prevailing low interest rates coupled with government support schemes (tax incentives, increased budget allocation for housing, timely announcement of stamp duty cuts by various State governments many of which are still ongoing) towards housing that has helped improve affordability. 

Graph 2 Will The Real Estate Demand Momentum Sustain in FY23?

Source: HDFC result presentation

The Factors Propelling Demand Momentum

The mortgage rates on home loans are at lowest ever currently. Mortgage rates on home loans have seen a drastic decline over the years, reducing from an average of 10.75% in FY2002 to an average 6.7% in FY2021. Also, the tax incentives currently in place for individuals help offset the borrowing cost further thereby reducing the net effective cost of borrowing to sub 6% levels. Mortgage rates are likely to rise, nevertheless, are expected to remain near historically low levels. 

Remarkably 2021 also saw an exciting IPO market along with all-time peak being made by the stock markets in October 2021. The stock markets have provided handsome returns over FY2021 and 9MFY2022 since touching lows in March/April 2020 (at the start of pandemic). Clearly the housing sector has been a prominent beneficiary of the positive sentiments around equity markets resulting in flow of funds from equities to the housing sector.  

Will FY2022 performance sustain in FY2023?

With nearly five weeks runway left in FY2022, the year indeed can be signed off as one of the best years for the real estate sector that saw confluence of all the factors supporting demand coming into play around the same time, thereby creating the most conducive environment for a home buyer to take the plunge. It, however, remains to be seen if this golden period will extend for the sector as we enter FY2023.

Having addressed the pent-up demand already (driven by desire to hold a physical asset, pandemic induced hybrid work culture) the growth engines of the economy will need to work full throttle for sustenance of demand momentum seen in the recent past. The multiplier effect of the investment/capex thrust brought about by Budget 2022-23 could take some time to cascade to other sectors including the real estate. Besides rising interest rates globally and domestic inflationary pressure looming ahead, apparently India is not expected to be an exception and could witness reversal of interest rates at home too (read with caution given the RBI dovish stance currently!). 

Graph 3 Will The Real Estate Demand Momentum Sustain in FY23?


Furthermore, the equity markets (a barometer of economic sentiments) have also been on a slide since the start of the new year and c.8.5% lower from the October 2021 peak. It will be interesting to observe if the demand curve for housing is sustained in the medium term thus bringing about an extended cheer to all the stakeholders of the sector.