Reasons Why Property Prices Are Rising in India

India's real estate market has seen a remarkable surge in property prices in recent years, driven by various economic, social, and regulatory factors. This trend has profound implications for homebuyers, investors, and policymakers. 

India, with its rapidly growing economy and burgeoning middle class, is experiencing a significant surge in property prices. According to analysts polled by Reuters, average home prices in India are set to rise by 7% this year and the next, driven by purchases of luxury properties. This trend reflects the broader economic growth and urbanization patterns seen across the country.

Despite the Reserve Bank of India's (RBI) interest rate hikes from May 2022 to February 2023, the housing market has remained robust, mainly due to the fast-growing economy. Home prices rose by 4.3% in 2023, the fastest increase since 2018, as per Reuters calculations based on the RBI's House Price Index.

 These are but just numbers. In this blog, we will explore the reasons behind the rise in property prices in India, current market dynamics, and the future of the real estate sector.

Several factors contribute to the rising property prices in India:

1. Economic Growth

India's economy has been growing rapidly in recent years, leading to higher incomes and increased demand for housing. This economic growth has significantly impacted the real estate market, with more people able to afford better living standards.

2. Urbanization and Population Growth

India's urban population is expanding rapidly as more people migrate to cities in search of better job opportunities and living conditions. This urbanization drives up the demand for housing, contributing to higher property prices.

3. Inflation and Construction Costs

Inflation affects every aspect of the economy, including the real estate sector. Rising prices of construction materials such as steel, cement, and labour have significantly increased the cost of building homes. Developers pass on these increased costs to homebuyers, contributing to higher property prices.

4. Development of Luxury Projects

In recent years, the Indian real estate market has witnessed a noticeable shift towards the development of premium and luxury projects. Though this trend caters to the growing demand from high-net-worth individuals and affluent buyers, it has also contributed to the challenges faced by the affordable housing segment. This has several consequences, including a significant rise in property rates across the country. 

5. Government Policies and Regulations

Government policies and regulations play a crucial role in shaping the real estate market. Initiatives like the Real Estate (Regulation and Development) Act, 2016 (RERA), aimed at increasing transparency and protecting buyers, have instilled greater confidence in the market. However, they have also led to increased compliance costs for developers, which often have to be borne by the buyers.

6. Low Interest Rates and Easy Credit

In recent years, the Reserve Bank of India (RBI) has maintained relatively low interest rates to stimulate economic growth. Low mortgage rates make borrowing cheaper for homebuyers, increasing the demand for housing. Additionally, banks and financial institutions have made home loans more accessible, further fueling the demand for residential properties.

7. Investment by NRIs

Real estate in India is not just seen as a necessity but also as a lucrative investment. Investors, both domestic and international, view Indian real estate as a stable and profitable asset. This speculative demand adds an extra layer of pressure on property prices. Moreover, the influx of Non-Resident Indians (NRIs) investing in Indian properties has also contributed to the price surge.

8. Limited Land Supply

Land is a finite resource, and in urban areas, it is even scarcer. The limited availability of land for development, coupled with stringent land acquisition and zoning laws, restricts the supply of new housing projects. This imbalance between demand and supply leads to increased property prices.

9. Infrastructure Development

The development of infrastructure such as metro rail, highways, and airports has a significant impact on property prices. Areas with improved connectivity and better infrastructure tend to attract more buyers and investors, leading to higher property values.

10. Changing Lifestyles and Preferences

The preferences of homebuyers have evolved over the years. There is a growing demand for premium housing with modern amenities, smart home features, and sustainable designs. Developers catering to these demands often price their projects higher, contributing to the overall rise in property prices.

11. Foreign Direct Investment (FDI)

The Indian government has relaxed FDI norms in the real estate sector, attracting substantial foreign investment. This influx of capital has led to the development of high-end residential and commercial projects, which are priced significantly higher than traditional properties. The presence of international developers and investors has added to the competitive landscape, driving property prices up.

12. Market Sentiment 

Market sentiment plays a pivotal role in the real estate market. Positive sentiment driven by economic growth, policy reforms, and infrastructural development encourages more investments, leading to increased property prices. However, this can sometimes lead to speculative bubbles where prices are driven more by investor sentiment than actual demand, resulting in unsustainable price hikes.

13. Environmental Regulations and Sustainable Development

With growing awareness about environmental sustainability, developers are increasingly incorporating green building practices and sustainable designs. While these initiatives are essential for long-term ecological balance, they often come with higher costs. Environmentally sustainable projects tend to be priced higher, reflecting the additional expenses involved in sustainable development.

The Future of Real Estate in India

The way forward for the Indian real estate sector involves addressing the challenges and capitalizing on the opportunities presented by the current market dynamics. To make housing more affordable, it is crucial to improve the fundamental structure of the sector. Strengthening the implementation of existing reforms like RERA and digitization of land records should be a priority, as they have demonstrably helped make the sector more transparent.

Interest rates are likely to drop in 2024, given the RBI's successful efforts to keep inflation levels in check and its intention to support growth. This will impact affordability and demand favorably, making homebuyers eligible for larger loans. Improved homebuyer attitudes, a preference for owning a house, and strong wage growth will continue to support the housing market.

As India continues to grow and urbanize, the demand for housing will remain robust. However, it is essential to ensure that this growth is sustainable and inclusive, addressing the needs of all segments of society. By focusing on transparency, affordability, and sustainability, the Indian real estate sector can continue to thrive and contribute to the country's overall economic development.

In conclusion, the rising property prices in India are a result of a complex interplay of various factors, including economic growth, urbanization, inflation, government policies, and market sentiment. While these factors contribute to the overall health and dynamism of the real estate market, they also pose challenges for affordability and accessibility. Understanding these dynamics is crucial for making informed decisions and shaping the future trajectory of the Indian real estate sector.

Average home prices in India are set to rise 7% this year and next, driven by purchases of luxury properties, according to analysts polled by Reuters who said the supply of affordable homes would continue to lag demand.

Barely dented by the Reserve Bank of India's 2-1/2 percentage points of interest rate rises from May 2022 to February 2023, the housing market has powered along with Asia's No. 3 economy, the fastest growing amongst major peers.

Home prices rose 4.3% in 2023, the fastest since 2018, according to Reuters calculations based on the RBI's House Price Index.

However, sharp home price rises add to the challenges of weaker segments in the economy that struggle with stagnant wages and poverty.

Poll medians from a Feb. 16- March 1 survey of 13 property market experts showed average home prices in India were forecast to rise 7.0% this year and next, little changed from 6.8% and 7.5% predicted in November.

The survey predicted home prices in the large urban centres of Mumbai, Delhi and Bengaluru rising 6.0%, 5.0% and 9.0% this year, respectively.

"We are expecting an uptick in demand for the luxury segment largely due to high-net-worth investors,"

Developers are channelling their focus towards launching more premium projects, contributing to the challenges faced by the affordable segment."

In answer to a question on the gap between demand for affordable homes and the supply of them over the coming 2-3 years, five said it would remain the same, four said widen and two said narrow.

Interest rates are...likely to drop in 2024, given the RBI has successfully kept inflation levels in check and intends to shift its stance toward supporting growth. This will impact affordability and demand favourably as homebuyers will be eligible for larger loans,

improved homebuyer attitude, preference for owning a house and strong wage growth will continue to support the housing market. 

The increase in housing prices in India over the past decades has not been owing to inflation, but because of issues in the real estate sector such as “lack of credible and rigorous land use planning and implementation, leading to constrained and unpredictable supply of land”, claims a paper by New Delhi-based policy think tank, the Centre for Social and Economic Progress (CSEP).

“This, in turn, gives rise to a less-than-competitive industry structure, incentivising and enabling developers/suppliers to keep prices high,”

The other reason for the hike in housing prices is the presence of a “shadow economy, or unaccounted income”. “It is commonly asserted that real estate offers a safe haven to store unaccounted income,”

First, India’s population is growing rapidly, which creates a need for more housing. Second, India’s economy is expanding quickly. resulting in more people having disposable income to invest in property.

Finally, the Indian government has been implementing pro-business reforms. That has made it easier to buy and sell property. As a result of all these factors, property prices are rising across India. This is good news for investors, but it does mean that affordability is becoming an issue for many buyers. It is important to remember that these price increases are not uniform. There are still plenty of bargains to be had if you know where to look!
 

1) Economic growth: India’s economy has been growing rapidly in recent years. Leading to more people having higher incomes and thus more demand for housing.

2) Increased foreign investment: Foreign investors. Have been pumped money into the Indian property market, driving up prices.

3) Lack of supply: The supply of housing has not been keeping up with the increasing demand. resulting in prices rising further.

4) government policies: The government has been implementing various policies that have been boosting the property market. Such as the introduction of Real Estate Investment Trusts (REITs).

5) Low-interest rates: Interest rates on home loans have been low in recent years. making it easier for people to afford mortgages and thus pushing up prices.

 

The Way Forward

The way forward, according to the researchers, is “to attempt to make housing affordable not only through subsidies, but also by improving the fundamental structure of the sector. Strengthening the implementation of existing reforms like RERA [Real Estate (Regulation and Development) Act, 2016] and the digitisation of land records, among others, should be a priority since they have demonstrably helped make the sector more transparent”.