The residential real estate class has been one of the steadiest asset classes available. Even through the Covid-19 pandemic, during the period of April-June, a survey by Housing.com indicated that residential real estate is the most preferred asset class (35% of respondents) followed by gold (28%), fixed deposits (22%) and stocks (16%). Interestingly, gold, which has witnessed its greatest run in the last two decades, is still the second most preferred asset class.
The residential real estate asset class has faced numerous headwinds over the last decade through a slowing economy, legislative impact through demonetisation, RERA, and dipping consumer confidence. Interestingly, over the past decade, housing prices have moved more in line with consumer psychology and societal behaviour rather than macro variables. This column explores the key drivers for residential real estate and argues that the upcoming five years might prove to be a golden run for the beleaguered asset class.
The bull run in housing prices (2008-14)
During the period of 2008-14, real housing prices (after adjusting for inflation) grew by an average of 10% (source: Economist) every year while consumer confidence index declined steadily during this period by an average of 5%-6% (source: RBI) as the economy grew at its long term average of 6.5% (source: World Bank). As consumer confidence dipped and the economy started dipping from the earlier decade of approximately 8% growth, the residential real estate class was driven primarily by qualitative societal norms.
During times that turn gloomy, residential real estate is seen as a safe hard asset necessary to prove you have arrived in life. With dipping consumer confidence, buyer values like safety, incremental risk-taking, and conservatism rather than liberal innovation start dominating communication across categories. In addition, as high-profile corruption schemes and expectations of massive bad loans ripped through the PSUs, it was only inevitable that consumers preferred the safe haven of residential real estate. From a supply side perspective, attractive clusters (e.g. Wadala in Mumbai, Whitefield in Bengaluru, and Noida in NCR) assisted in the rise.
The moderation in housing prices from 2015
During the period from 2015, real housing prices grew at a much flatter rate of 2%-3% (from an earlier period of around 10%) while consumer confidence picked up, growing at an average of around 3% (from a decline of 5%-6% in the earlier period) while the economy grew at a similar rate of 6.5%-7%. This is again primarily explained due to changing consumer psyche during this period.
During the period after 2015, with the rise of the gig economy, fundamental consumer behaviour moved to an asset light model (across transportation, hospitality, and other consumer-oriented industries). Residential real estate was no longer seen necessary to have arrived in life. Communication values across categories moved towards innovation, new paradigm, drastic risk-taking with the lure of entrepreneurship, and forgetting the past.
Conversations around poor rental yield (around 2%-3% in India), which were never looked at earlier, started dominating drawing room conversations. In addition, the lure of previous hubs started to head towards saturation and legislations like demonetisation and RERA did play their part in driving supply side constraints.
The upcoming bull run for residential real estate (2021-25)
There is a likely movement towards residential real estate as lead metrics visible during the period of 2008-14 are mysteriously being met.
Consumer psychology over the next few years is expected to turn sour with excessive focus on safety, hygiene, limited risk-taking, and a conservative set of values. Across consumer-oriented companies, communication values are moving away from the liberal innovator to old-age conservatism.
During difficult economic times, consumers tend to buy something which they can call their ‘own’ along with the expected reduction in asset sharing models. In addition, as other economic classes like corporate earnings struggle with growth and banks expected to face a default risk after the moratorium is lifted, residential real estate is likely to emerge as a reliable alternative.
As with other high-ticket consumer-oriented categories, discovery and pre-purchase is likely to be led by digital channels while the actual purchase is likely to be led by physical channels. This rise is expected to be across affordable and luxury housing segments in metro and tier 2 cities. Supply side drivers such as timely delivery, regulatory compliance, affordability, a move towards end-consumer fairness, and easy financing need to be functional as an ecosystem. In summary, residential real estate might be entering its golden years over the next half a decade with real housing prices potentially growing at 10%-12% a year.
In conclusion, the residential real estate asset class has always operated in extremely resilient and mysterious ways. Given end consumers and societal norms have historically driven the asset class, the next five years are likely to be one of the biggest golden periods for the sector. In case you are planning to buy one for yourself, now might just be the best time.
Views are personal. The author is an MBA from IIM Bangalore and a strategy course holder from INSEAD. He has been a strategy consultant for over a decade. He is the author of three books, ‘Yours Sarcastically’, ‘Satan’s Angels’, and the upcoming ‘Hacks for Life and Career: A Millennial’s Guide to Making it Big’.