After potential breather on rate hikes, realty stocks face fresh hurdle

Real estate firms listed on the stock markets have logged impressive pre-sales and bookings over previous quarters, painting a picture of a robust FY23 and a promising pipeline for FY24. However, the affordable housing sector remains an outlier, grappling with the strain of steep home loan rates given that buyers in this category are relatively more sensitive to interest rate hikes.

There is increasing consensus for a pause in interest rate hikes at the upcoming RBI meeting, which is anticipated to be succeeded by a rate cut. Yet, this may not be sufficient to maintain the ongoing sales momentum in the housing market, given that a significant portion of Indian investments is reliant on household income. For sustained growth, a notable uptick in this income is crucial.

According to an analysis by Motilal Oswal Financial Services, while subdued house prices and peaking of interest rates are likely to provide some support, continued weakness in income growth represents the biggest hurdle to the structural comeback story of the residential property market.

“A comparison of household income (also called personal disposable income) growth to private final consumption expenditure growth reveals that the latter has outpaced the former continuously in the past decade, right up to FY22,” said the Motilal Oswal report dated 16 May. “The only exception in the past decade was FY21 on account of COVID-19, when consumption declined while income increased slightly,” it added. Thus, maintaining the current momentum in housing sales and investments hinges largely on a notable uptick in household income growth.

In the last year, the Nifty Realty Index has advanced by 15%. However, any significant gains in real estate shares depend heavily on the trajectory of pre-sales and launches.