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IREF® - Indian Real Estate Forum > Real Estate in India > Real Estate Bangalore > Present overheated property market is good for economy in long term
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Old August 1 2012, 01:02 AM   #1
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Default Present overheated property market is good for economy in long term

Here are the perspective of each stakeholders.

End user: Since property rates are very high nowadays, those who have deep pocket, can only venture into the property market. Also RBI guidelines are now restricting the banks to finance only 70% amount of the overall expenditure. So genuine buyer will be in the market and speculative buyers will be kept away. If buyer defaults in EMI payments, then his down payment will also be stuck and that is significant amount considering 30% of the total cost. People are saying and fence sitters will jump in if the property prices reduced by 10-20%. So lets assume that real estate prices are 20% more than the real worth. Now, if end user buy the property, he is going to live in that and hence he will not sell it in near future. So in long term, the present volatility will not matter. Today in 2012, do it matter to the person who has bought property in 1992 or 1993. The difference is insignificant at today's price. So who ever buy real estate today will not be at loss after 15-20 years. Those who became investor overnight with cheap loan and 90-95% finance in 2005-2008, will be out this time and there will be no artificial demand in the market.

Developers: Since the sales volume has dropped by almost 50-60%, they will not launch new projects. This is very evident if we see the property launches in recent past at metros. This way there will be check on the supply. Those people who become builders overnight in the last few years, will forced to take other employment opportunities. Only the builders who has deep pocket, can survive this downturn. So consolidation will be there in the real estate sector and is good for the industry. So the present prices will not see much movement and appreciation will be similar to general inflation rates, and not 30-40% YoY.

Investors: Those who have booked in 2005-08, made a killing by selling those in today's price. but since the sale volume is dropping at alarming rate, it's becoming very difficult to sell at today's environment. so who manages to exit, will not re-enter again, which in turn keep pressure on the sales volume. New investors will not enter the market in these scenario. This will help in balancing the demand supply equilibrium. Investors who are full with cash can only afford to buy now, not by taking loan, interest rate is too high. These numbers are limited.

So the end result is, there will be less new launches now, prices will be stagnant and will increase with general inflation and most importantly, property sizes will reduce, not the price. See the level of sensex for last 5 years, real estate might become the same in next 5 years. So if you have 30-40% of the property cost at your disposal and has zeroed on a property, this is a good time to bargain and 8-10% reduction in rates are possible if you are a genuine buyer!!!
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Old August 1 2012, 09:26 AM   #2
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Quote:
Originally Posted by sarkarsk View Post
Here are the perspective of each stakeholders.

End user: Since property rates are very high nowadays, those who have deep pocket, can only venture into the property market. Also RBI guidelines are now restricting the banks to finance only 70% amount of the overall expenditure. So genuine buyer will be in the market and speculative buyers will be kept away. If buyer defaults in EMI payments, then his down payment will also be stuck and that is significant amount considering 30% of the total cost. People are saying and fence sitters will jump in if the property prices reduced by 10-20%. So lets assume that real estate prices are 20% more than the real worth. Now, if end user buy the property, he is going to live in that and hence he will not sell it in near future. So in long term, the present volatility will not matter. Today in 2012, do it matter to the person who has bought property in 1992 or 1993. The difference is insignificant at today's price. So who ever buy real estate today will not be at loss after 15-20 years. Those who became investor overnight with cheap loan and 90-95% finance in 2005-2008, will be out this time and there will be no artificial demand in the market.

Developers: Since the sales volume has dropped by almost 50-60%, they will not launch new projects. This is very evident if we see the property launches in recent past at metros. This way there will be check on the supply. Those people who become builders overnight in the last few years, will forced to take other employment opportunities. Only the builders who has deep pocket, can survive this downturn. So consolidation will be there in the real estate sector and is good for the industry. So the present prices will not see much movement and appreciation will be similar to general inflation rates, and not 30-40% YoY.

Investors: Those who have booked in 2005-08, made a killing by selling those in today's price. but since the sale volume is dropping at alarming rate, it's becoming very difficult to sell at today's environment. so who manages to exit, will not re-enter again, which in turn keep pressure on the sales volume. New investors will not enter the market in these scenario. This will help in balancing the demand supply equilibrium. Investors who are full with cash can only afford to buy now, not by taking loan, interest rate is too high. These numbers are limited.

So the end result is, there will be less new launches now, prices will be stagnant and will increase with general inflation and most importantly, property sizes will reduce, not the price. See the level of sensex for last 5 years, real estate might become the same in next 5 years. So if you have 30-40% of the property cost at your disposal and has zeroed on a property, this is a good time to bargain and 8-10% reduction in rates are possible if you are a genuine buyer!!!
Brilliantly analyzed.
 
Old August 1 2012, 10:08 AM   #3
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+1

Perfectly said.

Also it remains that Real Estate is an important investment avenue from time immortal and will remain so.

With ever increasing population of India genuine growth in real estate will always be there.

Currently Builders work at very high margin rate, with things returning to normal state they would also fall in line and be happy with 20% margin as in any other business.
 
Old August 1 2012, 10:18 AM   #4
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I think it will not be so easy for Builders. As you correctly pointed out the small operators will get filtered out due to lack of funding, margin pressures, stagnating sales thereby impacting their working capital.

Larger builders however face a different problem. While they would ideally want to take a pause and wait till market stabilizes, thereby ensuring supply is not overly higher than demand, most of them are now listed on the exchanges. They are answerable to their shareholders. Each company will try to show progress on a Quarter on Quarter basis to keep shareholders happy (who already must be disgruntled the way realty stocks have taken a beating). Whenever this happens, we have seen companies making short term decisions to meet quarterly targets at the expense of long term gains/strategies.

Supply will continue to be a concern and thus push prices down at least in the short-medium term. Note that builders operate on huge profit margins and if things go bad, they willl definitely take a hit on margins to keep generating sales. Listed companies cannot afford to take breaks.
 
Old August 1 2012, 10:41 AM   #5
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Situation now is very similar to 2008. Expect a correction next year..
 
Old August 2 2012, 12:03 AM   #6
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Quote:
Originally Posted by nishajainwal View Post
Hi Friends,
I am new member and this is my first post. Real estate is very growing industry due to urbanization.
@hishajainwal,
Welcome to IREF
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Old August 2 2012, 12:56 AM   #7
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Prices will never come down in real state.
 
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