Being in the real estate industry, my social gatherings at work are all about discussing the current market scenario, the demand and supply mismatch, impact of the latest regulatory reforms, and so much more about the industry.
Last week in one such gathering, a colleague asked, “When will real estate prices come down?” Before I could answer his question, another friend asked, “Is Indian real estate headed for a crash?” When you consider the recent free fall of the Indian rupee, rising crude oil prices, and the fluctuations of the Sensex, you might wonder if real estate is next in this complex mix.
Complex questions, I must say! I wish I had a crystal ball to see the future and give a straightforward answer. But understanding the complexities of real estate prices involves a lot of serious thought.
But why are people expecting property prices to fall? You may say “because the prices have skyrocketed!” Could be. But there’s more to it. ‘Oversupply’ in the Indian property market is the latest buzzword within the real estate fraternity.
There has been growing concern about the increasing number of unsold inventories. Now as per the fundamental economic principle, when supply exceeds demand, prices tend to fall. This is precisely why prospective homebuyers are expecting prices to correct.
The demand for housing in India is perennial. Then, how did we reach a situation of oversupply? This can be attributed to the demand-supply mismatch. There are not enough homes that match the requirements of prospective homebuyers.
Several reports have often stated that the maximum demand across cities is for properties within Rs 40 Lakh while the majority supply is in the range of Rs 60-80 Lakh. Hence, oversupply!
The current prices
When you consider four major cities of Bangalore, Chennai, Hyderabad, and Pune, you will notice that property prices have either corrected or remained stable over the last one year.
Hyderabad was the only city that recorded a rise in capital values in the backdrop of increased commercial activity. So, despite the current fluctuations in the Indian economy, it doesn’t appear to me that the real estate market will receive a significant price correction. Typically, price corrections do not happen overnight and in a uniform manner across cities. Correction occurs gradually at the micro-market level.
What I have seen is that the Indian real estate market, despite all the chaos, is in a resurgence phase in terms of sales volume and new launches. And property prices are not falling, but rising!
As per the National Housing Bank’s housing price index NHB RESIDEX, residential prices rose 5% in Hyderabad, 3.8% in Mumbai, 2.3% in Bangalore, and 0.7% in Chennai from a year ago. Why is this so?
Understanding the reasons
Land prices: The cost of acquiring land in metros is quite high. It accounts for about 30-40% of the total project cost.
Is there a solution? Well, at present, substantial land parcels are reserved by central and state government entities such as the railways, ports, and defence authorities. For achieving the ambitious ‘Housing for All by 2022’, these under-utilised and vacant land parcels must be freed for development through land regulations, land readjustment, and pooling policies.
Cost of approvals: At present, a real estate project needs to be cleared by as many as 40 departments, including the environment, fire, water, revenue, and so on. If we were to believe the market reports, it takes anywhere from one to two years to get the requisite approvals in place. This cost is later passed on to homebuyers.
As mentioned in my earlier posts, single-window clearance is the need of the hour. If a single competent authority is responsible for approving development plans and building plans, the problem of project delays will reduce to a significant extent. It will also have a substantial impact on prices.
Cost of raw materials: A project cycle begins with pre-launch where a developer typically sells about 15-20% units. The funds collected in the pre-launch is utilised for approvals and other costs.
Now, at the pre-launch stage, a price is fixed for a project. From the pre-launch, it takes about 3-5 years for a project to be complete. During this time, the cost of raw materials can change, which will eventually result in a price hike.
Consumer sentiments: Lastly, there is no guarantee that buyers will take the plunge after reducing prices. Moreover, a developer cannot pre-launch a project at Rs 3,000 per sq. ft. and launch it at 2,800 per sq. ft. It will only result in booking cancellations and negative sentiment. It will also encourage people to hold back further in anticipation of further reductions.
So, have I dampened your hopes?
With the festive season around the corner, however, expect several discounts and offers.
But when it comes to real estate, short-term corrections should not matter to the long-term investor.
So, just as with stocks, don’t wait for price corrections or try to time the market. With general elections next year, inflationary pressures, and rising interest rates, the best time to buy a home or property is now.
This article is contributed by Gowri Shankar Nagarajan, Co-founder & CEO, RoofandFloor.