Since demonetization, there has been constant chatter in the media regarding a possible collapse in the real estate prices. In the regard, it would be interesting to note that future path of property prices will be a function of generating additional demand, in the view of apparent oversupply in most of the micro markets in India.
Demand for house property is a function of house affordability. Gigaparsec, our sister firm, has developed an unique Housing Affordability Index. This index is based at 100 for April 09-March 10 period, when the property prices in India were low following the global financial crisis.
As shown below in the chart, the affordability index fell to around 75 in the middle of 2011, as a combination of rising mortgage rates, and property prices. However, since that bottom, the affordability is improving, especially in the last two years, due to slow pace of price rise, as compared to income growth and decrease in interest rates.
Right now affordability is the best since 2009. Any further fall in real estate prices will attract buyers. Since quality house ownership in India is low, the rise in demand will be faster than expected by the market and hence, correction in prices will be lower than expected.