Recently the Govt of India approved the implementation of 7th Pay Commission. It is one of the major development for Indian Economy. I received calls/emails for my opinion on the impact of 7th Pay Commission on the property market. I thought of sharing my views through the blog :). If we go by the market reaction then definitely the impact on real estate sector will be positive. The reason being, all the real estate stocks rallied :). The builders are quite optimistic and they are anticipating improvement in the property market. The media is gung-ho about the implementation of 7th Pay Commission. The real estate experts are expecting a +ve impact on the property market.
The main reason for this euphoria is learning from the past. The implementation of 6th Pay Commission in 2008 revived the property market in a true sense. The builders, media, stock market and experts are predicting same magic this time. Moreover, among all the sectors, the real estate sector is in a more dire need of a good news. In Hindi, there is a famous proverb “Doobte ko Tinke ka sahara“. In English, it means “A Straw supports drowning men“. The 7th Pay Commission is like a straw that will support property market (read: drowning men).
What is Common between 6th and 7th Pay Commission?
Though this point is not of much relevance to the post but i couldn’t resist sharing. It’s a coincidence that 6th and 7th Pay Commission are implemented when the Global Economy is in turmoil. We witnessed one of the worst financial crisis in 2008. According to experts, at present, we are on the verge of another financial crisis similar to 2008. It is called 8-year itch that i discussed in my post, Stock Market Crash.
In my opinion, it is the best time to implement 7th Pay Commission. The money in the hands of govt employees will fuel demand/consumption. In other words, 1L Crore will be in the hands of Govt employees to spend. It will help to maintain GDP growth during turbulent times ahead. In such a scenario, the impact of the financial crisis is cushioned to some extent. Therefore, 7th Pay Commission is blessing in disguise for Indian Economy.
7th Pay Commission – Why the past learnings are not relevant?
The biggest beneficiaries of 6th Pay Commission were Real Estate, Automobile and Consumer Durable Sectors. As i mentioned that experts are expecting a repeat of 6th Pay Commission post implementation of 7th Pay Commission. I agree that this time also automobile and consumer durable will be biggest beneficiaries. On the other hand, I beg to disagree on real estate sector.
Now you must be wondering why so? To explain the same, let me share an example. I am quoting this example for reference purpose. This example is based on actual data points. Assuming i am a Govt employee and i was planning to buy a property in 2008. The Property A shortlisted by me was costing 30L at the time of implementation of 6th Pay Commission. My salary was 40k per month in 2008. The average hike of 6th pay commission was 40% i.e. 16k per month in my case. I received arrears for 32 months in 2008. Therefore, i received lump sum payment of 5.12L as arrears.
In 2016, my current salary is 1.03L per month assuming 8% annual hike including a hike in DA in last 8 years. 7th Pay Commission increased my salary by 23.5% i.e. approx 24k per month. My revised salary will be 1.27L per month. Please note that this time, i will receive arrears for 6 months only i.e. 1.44L. The same property A is now costing 90L i.e. average increase of 3 times in last 8 years in Metro and A cities.
With this background, Let’s check out the reasons why real estate sector will lose out or miss the share of wallet post 7th Pay Commission implementation.
Post implementation of 6th pay commission employees received 32 months arrears. It helped them to arrange/pay the down payment. In 2008, the LTV was not stringent at 80%. LTV was 85% to 90% and the cost of stamp duty and registration charges were also part of the home loan. In the above-mentioned example, the arrears received (5.12L) were approx 17% of the property value (30L). In other words, in 2008 i need not worry about down payment and was in a very comfortable position to buy a property. The govt employees diverted the arrears for down payment.
Post 7th Pay Commission implementation, my 6 months arrears is only 1.44L i.e. just 1.6% of current property cost. I need to pool 18L towards down payment from own pocket. Therefore, at present, the property is not affordable until unless i pool good amount of money from my end towards down payment. Alternatively, i have to settle for smaller size property or in a substandard locality or at the outskirts.
The home loan interest rate was at par in 2008-09 compared to today’s Home Loan interest rate. In 2008, My home loan requirement was approx 25L and my Home Loan EMI would have been 25k per month. Therefore EMI to net take home salary ratio was approx 45%.
Post 7th Pay Commission, my Home Loan requirement is approx 72L provided i can arrange the down payment, stamp duty and registration charges from own sources. My EMI will be approx 72k per month i.e. approx 57% of net take home salary. Therefore, the probability of Home Loan Rejection is high in current scenario i.e. i do not meet the income criteria. In a nutshell, post 7th Pay Commission the affordability factor is low compared to post 6th Pay Commission. Therefore, it is not wise to take precedence of 6th Pay commission for the potential impact on real estate sector.
For a minute, if we forget about the example and above mentioned 2 points. The sentiments of investors and buyers are negative towards property market. One of the key reason is that buyers/investors are anticipating that property price will correct further. Therefore all stakeholders are in a wait and watch mode. The property prices already corrected in many pockets but this wait and watch mode is more dangerous. It will be interesting to see who will blink first. Therefore, in my opinion, till the time sentiments turn positive this pain will continue. Liquidity in the hands of buyers (Govt Employees) post 7th Pay Commission will not change the sentiments towards property market.
Words of Wisdom:
As i shared that affordability is the key in the property market. Govt employees will not mind buying a 2/4 wheeler or consumer durable goods as it will not burden the pocket much. When it comes to property, the areas that are comparatively affordable post correction may see some uptick. At the macro level, real estate sector will miss the party this time. It seems the wait for buyers is getting longer.
Lastly, among all the asset classes, the overall sentiment towards Gold Investment is more positive and bullish. I am anticipating some of the cash in hand will flow towards Gold Investment.
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