Can India’s Residential Property Market Continue Its Pace? Motilal Oswal's Analysis

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Motilal Oswal Report

India’s residential real estate (or property) market has witnessed tremendous growth in the past couple of years. In this note, we discuss whether these trends are supported by structural factors or are more likely to fade off in the near future.

Our analysis suggests that continued weakness in income growth represents the biggest hurdle to the structural comeback story. At the same time, subdued house price growth and the peaking of interest rates provide some support.

After remaining range-bound for more than six years, the realty equity index doubled in CY21, after which, it came off its highs and has been range-bound in the past 15 months (before showing some recovery in the past month). We contend that this sector can witness another bout of rebound only if the current strong momentum in house sales continues. However, we believe that sustaining this momentum would be challenging without a sustained growth in income levels.

It is also ironic to note that while the share of property sector in the economy is one of the highest and households are major investors also in India, housing debt is among the lowest at just about 10% of gross domestic product. Such low housing debt in India suggests weak impact of interest rate on the property market. At the same time, it presents an opportunity as there is enough scope to push it forward.

Overall, we believe that the rate hiking cycle has concluded now, and the next likely rate action will be a cut. However, sustaining the momentum in housing sales and household investments may prove challenging, unless there is significant improvement in household income growth.

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