Luxury Housing Is Outperforming Across Markets: Three Factors That Will Determine Whether the Boom Can Last

Luxury housing is one of the strongest-performing segments in Indian residential markets in recent years. The sustained performance of the segment suggests that the trend is more than a temporary post-pandemic phenomenon. However, whether the boom can continue will depend on a combination of supply, income growth, buyer intent and the fundamentals of the markets. The growing prominence of luxury housing is partly due to a chain of events. Rising land and construction costs have made it difficult for developers to launch projects in affordable and lower-priced segments. As a result, a greater share of the homes that enter the market today are positioned at the higher end. However, whether this surge is a sustainable option or not in the long-run remains a huge question. Here are three factors that determine the longevity of this trend.

Supply

The increasing supply of high-end housing has played an important role in the segment’s growth. More developers have entered the luxury segment, while projects of affordable pricing are launched because of the rising cost of land, construction and other inputs. This has changed the composition of the housing market, with a larger share of new supply concentrated in the premium segment; luxury housing has gained a huge market share. “Luxury has done well for a few years now, which makes it more than a passing phase. A large part of it comes from supply. More developers have chosen to build in this segment, and fewer affordable projects are being launched, mainly because land and construction costs have gone up. So a bigger share of what is available today sits at the higher end. The demand is dependent on the project, pushed by the developers and the pricing. How long it holds will depend on income growth and on whether supply across other price ranges keeps up. Different markets will behave differently,” adds Shrivallabh Goyal, CEO, Reliance MET City.

The balance across different price segments is therefore crucial. A sustained housing cycle requires an adequate supply across the income categories. If affordable and mid-income housing remains tight while premium supply continues to expand, the market could become greatly uneven for homebuyers to invest.

Income growth

The sustainability of these luxury housing projects is ultimately tied to the homebuyer’s ability to purchase. High-end homes are typically more resilient when buyers' incomes rise, which allows them to absorb higher property prices. Growing incomes make it easier for the broader economic environment to develop for this particular market. If prices of property rise faster than the incomes of buyers, affordability pressures could emerge as a new threat to the realty market in India.

“We believe the luxury housing segment is being driven by structural wealth creation rather than cyclical factors, making its growth more sustainable. India is at the cusp of an unprecedented wealth creation journey, fuelled by entrepreneurship, capital markets, IPOs, private equity investments, M&A activity and the growth of family businesses. This is steadily expanding the pool of entrepreneurs, promoters, CXOs, professionals and NRIs seeking premium and branded residences. India is also witnessing a growing trend of affluent families upgrading from independent homes in Delhi and Gurgaon to professionally managed luxury communities offering world-class amenities, hospitality-led services and a superior lifestyle,” adds Pratik Tibrewala, SVP & Head Corporate Finance at M3M.

Buyer intent and location

Luxury housing demand today is stemming from different types of buyers. Some investors are looking for properties for their own use; however, several are now seeking properties with a long-term investment view. The balance between the two varies from location and the nature of the projects. This makes it harder to provide one explanation for the demand all across the country. However, what remains common is the set of factors buyers consider before they proceed with making this decision. Location continues to be critical, and so does the quality of construction, purchasing power and infrastructure around the project. For the end-users, these factors determine the quality of life. For investors, these aspects dictate the potential of the property in terms of rental growth. A luxury home cannot thrive solely on the price tag it comes with; it needs sustainable factors that support the reason for the price and the long-term relevance.

The broader lesson is that the luxury housing market is not a single national market. The future of this will be shaped by several hyperlocal reasons. The surge cannot continue indefinitely on the back of the premium segment solely. Income growth, location, and supply are in tandem, and hence this segment is moving positively.