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Why property prices rarely crash


Why property prices rarely crash

Last updated: July 31 2012
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  • Why property prices rarely crash

    When do you put your home on the block and move to an inexpensive destination? When do you look for a buyer for your second home? Only when you fear losing your job; only when you sense you may take a long time to wriggle out of the mess your business has run into. Luckily, not too many have suffered such dramatic reversal of fortune.

    It certainly hasn't reached a staggering number - and possibly will not in the near future - that will soften ready-home prices. The pangs of distress that rattle property markets aren't everywhere. And in pockets where the pain is felt, the sufferers know how not to make it too visible.

    Properties aren't stocks: a share selloff by someone battling bankruptcy will pull down the price of the stock, leaving all shareholders poorer; but the sale of an apartment (by someone who has fallen into bad times) - even at a price that's well below the going market rate - is unlikely to impact prices of other flats in the building, let alone cause ripples in the property market.

    In residential properties, there are markets within the market; and in that slice of the market - where apartment owners are typically end users - prices are most sticky.

    There is another part of the market (particularly in Mumbai) where prices are high and have stayed high, albeit artificially. These are residential properties where the builder has completed construction and multiple approvals are in place. Such apartments command a stiff premium.

    This is a sellers' market and no amount of negotiations will fetch you a great deal. With a large numbers of constructions awaiting some clearances, the ones which have all the clearances are in big demand. Indeed, less than 10% of constructions in the country receive all approvals on time.

    Of course, there are projects where booking is on and you may walk into the developer's office with your cheque book, displaying a genuine intention to buy with some upfront cash. These are constructions in the launch and pre-launch stages.

    There will be some room for bargaining if the developer is convinced that you are a serious buyer, not just someone who is casually snooping around. But there are risks: you don't know by when all clearances will be in, how long the construction may take, and by when you can move in.

    While deals are fewer and many builders are feeling the heat, it may be an error to believe that a fire sale is about to begin. Large developers have holding power, and even smaller ones figure out ways to roll over loans and keep off creditors by borrowing from private financiers roped in by wealth management arms of brokerages and non-banking finance companies.

    A few have unencumbered land (bought a decade ago) which can be leveraged to raise funds, some may go for fresh borrowings through a subsidiary to service old loans. It's another point that many of these wealthy, private lenders may have wrongly assessed the value of the land and property pledged, and that some of them may end up losing money when a builder goes belly up. But unless money markets run dry, stocks crash and there is widespread joblessness, such defaults will not rattle the overall property market.

    Don't always judge the financial health of a builder from analysts' reports on the stock of the company he owns. First, the cash received by developers - which is as much as 20-25% of the property value - is not captured by analysts who largely depend on balance sheets. Second, the land on the books is mostly valued at historical cost.

    Also, smarter realtors are unlikely to repeat the mistakes of 2006-07 when all property firms were keen to list their stocks. Advised by investment bankers, they went on a land buying spree.

    The arithmetic was simple: a land bank on the offer document coupled with the floor space index with the builder is a tool for fabulous profit projection: the company will sell X number of apartments at Rs 10,000 per sq ft against a construction cost of Rs 3,000.

    So purchasing land parcels by paying 20% of the money was one sure shot road to improve valuation of a company that's dressing up for an IPO. In October 2008, when markets froze, many builders were unable to pay the next instalment on the land they 'bought'. Most of them had focused on high-end properties for which there were no takers. Today, many builders have a mix of high-end and mid-income properties to lower the risk.

    Ever heard of a builder going to the CDR ( corporate debt restructuring) cell? Chances are not many will. Lenders will take a long time to pull the trigger and acquire properties. At the end of the day, some developers will sell land and a few will fall by the wayside. But many will manage to rope in a few investors to stay afloat and hold on to high prices.

    Developers don't mind paying a small penal interest if the properties are not delivered on time; there is no law - and there won't be one in a hurry - where the builder is made to pay a huge penalty for the delay.

    And, most importantly, there will always be some buyers even if transactions slow down: the demise of defined-benefit pension and the absence of social security net will compel the salaried to buy properties - the only asset they believe will not let them down.
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