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Waiting for Property Prices To Fall? Don't

Last updated: October 22 2012
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  • Waiting for Property Prices To Fall? Don't

    The last time Bharat Sharma went looking for a house that fit his budget of `40 lakh was in January 2011. Prices were high then and so were interest rates. The same month, he came across reports about a possible correction in property prices in the next one year. The arguments were compelling. Property prices and interest rates were high, making EMIs unaffordable. Income growth had slowed down, job creation was on the wane, inflation was high and there was oversupply in the market. With everything pointing to property prices coming down,Sharma decided to wait. He is now back in the market looking for a property, with a slightly higher budget (`42 lakh). But contrary to his expectations, prices have not gone down. In fact, they have risen. “The project that I was considering is now sold out and the others launched recently in the same locality are quoting at higher prices,” he says. Why did property prices defy what the market pundits were expecting?

    What prevented them from falling?

    Continuing investor interest Investors are the lifeline of a cashstrapped developer. They are the ones who are keeping builders afloat even now. Pankaj Kapoor,managing director of real estate research firm Liases Foras, explains that compared to 1995, when there was shortage of liquidity in the market which led to a crash in the real estate sector, the situation now is quite different. “There are hardly any avenues which offer you safe returns today. The stock markets are volatile and gold prices are also at an all-time high. So, investors look at the real estate sector to park their excess funds. It is not the developers who would have to take a price cut but the investors,” he adds. According to Kapoor, it is the investors who are instrumental in the property prices staying firm. “Besides this, there are a lot of venture capital firms which have bought huge stakes in realty projects. For the developers, it is a win-win situation. Since they have already cut down on their losses, they won’t be losing much even if the rates come down a bit,” he adds. However, in some cases it is also because of these investors that the builders cannot reduce prices substantially. “A big investor who puts in money at the pre-launch stage of the project is also looking to exit at a higher rate later,” says a Gurgaon-based real estate broker. “If the developer reduces the ticket price, the investor will not be able to sell his properties in the market and, therefore, will not invest in the builder’s projects in future,” he says.

    Restricted supply

    One of the main reasons for residential property prices correcting only marginally in some locations or not at all in most, was the restricted supply of new projects. According to real estate consultancy firm Knight Frank, the pace of new project launches was severely crippled in 2011. During 2010, roughly 3.61 lakh residential units were launched across the top seven cities of Mumbai, Delhi NCR, Pune, Kolkata, Bangalore, Chennai and Hyderabad. However, only 1.72 lakh units came up in 2011, a decline of 52% over the previous year. The decline in new launches was sharper in certain locations, such as Mumbai, where prices were high and buyers few. For instance, just about 19,470 units were launched in Mumbai in 2011 compared with the 54,968 housing units built in the previous year.

    While fewer new launches were one reason for the restriction in supply, project delays also played an important role. The situation is likely to continue for some more time. According to property research firm PropEquity, nearly half of the 9.3 lakh under-construction residential units in the country, scheduled for delivery between 2011 and 2013, are likely to be delayed by up to 18 months. While reducing the number of new launches is a natural reaction from the builders in a slow market, developers also restrict the number of projects in the market by other means. Some builders have recently started inserting restrictive clauses in the sale contracts that prevent buyers from selling the house before a specified time (usually one year of buying). While the builders claim that they are doing this to prevent speculators from buying into the projects, the real reason is that the developer does not want the housing units to be out in the market at a lower price (by the seller) in times of a slowdown. “This is primarily to have control over the time period before their property comes back in the market for sale. It would also deter speculators to offer the property at a lower price than what the developer is offering,” says Ravi Goenka, advocate at Mumbai-based Goenka Law Associates

    Rising construction costs

    Almost all builders will today quote this as one of the main reasons for increasing property prices. Though the impact is often exaggerated and may sometimes look like an excuse, the fact is that the cost of construction and materials has actually gone up in the past one year. “With the cost of raw material like cement, steel and other inputs going up by 25%, it is just not possible for developers to reduce the cost, unless the government offers some subsidy,” says Niranjan Hiranandani, managing director of Hiranandani Group. The incidence of taxes, among the highest in the world at nearly 30-32%,Hiranandani points out, is also coming in the way of a price reduction.

    Multiple intermediaries

    In many markets in North India, the developer is no longer the one selling his project to the retail buyers. There are underwriters, big brokers, brokers and sub-brokers in the market who have entered the sales flow (see From the seller to the buyer) and who have their own margins to take care of before an apartment reaches the end-user. The intermediaries also affect the resale market. “The estate agents are the first point of contact who influence the decision making process of both the buyer and the seller,” says Ganesh Vasudevan, vice-president, , a real estate portal.

    Builder cartels also at work

    While on the one hand builders complain of cement and steel cartels pushing up the construction cost, they have now started operating their own mini cartels in smaller markets. They fix the quoted price as a group in a location. “There is usually a pattern in which the developers increase prices around the same time,” says the marketing head of a real estate company. It’s another matter that the differentiation in price happens in the form of discounts being offered to serious buyers. When 37- year-old Vasanta Sobha Turaga from Hyderabad started scouting for a property in the prime location of Banjara Hills, she found it tough to get one in her modest budget of `30 lakh. “Though there is virtually no demand in the market, the developers just won’t let the prices come down. Many brokers do agree that they hardly manage any business, but the developers work in tandem and just won’t agree to sell the property with a price cut,” says the conservation architect.

    Unit sizes have shrunk

    Another tactic that builders are using to maximise their returns is by reducing the size of the units. The standard apartments being sold today are far smaller than the average unit sold a few years ago. “The per square feet value remaining constant, what has shrunk is the size of units in places where density norms were eased, such as in Noida, and where FSI restrictions have been rejigged,” says Jayashree Kurup, head, digital content and research, , a real estate portal. By building smaller flats the builder not only makes more money since he is selling more units, his expenses on the common facilities also remains the same despite the rise in units. Builders have also begun to increase the margin between the super area (which he quotes while selling) and the carpet area (the usable area that you get).

    WHY YOU SHOULD NOT BET ON A CORRECTION

    Real estate is unlike any other investment in many ways—the entry barrier is high, liquidity is low and reliable market information is rare. It is different from other investments also when it comes to a correction. When it comes to the primary market, builders rarely ever decrease the price. In case of a cash crunch, the first resort is attracting buyers by offering discounts, which varies from buyer to buyer. This means that you cannot point to a new lower base price. If the builder is really short of cash, then instead of reducing the ticket price of his existing project, he launches a new one with different specifications at a lower price point. But this too is not technically a correction since the project and specifications are different.

    The same holds true in the resale market. Unlike in stocks or mutual funds where you can track prices or NAVs, you do not have access to a reliable valuation of your property on a given day or month.

    Best locations get sold out first

    Getting a good property is also about getting a good location—both for the project as well as for your apartment within a housing project. And the fact is that the best locations get sold out first, such as park-facing corner apartments. One of the major reasons for prices holding up in places close to business districts or work places is that consumers do not want to travel long distances for work. People are willing to pay a high price to stay nearer their workplace. Though there are projects available farther away in the city periphery, the clamour is for the projects closest to the city’s business districts. This means that even in a lukewarm market when there are very few buyers, the best locations and projects will be the first ones to be picked up.

    Affordability will catch up

    As our survey shows, a majority of the buyers would be back in the market if they can afford the EMIs. With interest rates set to go down (a few banks have already brought down their base rates), some of the latent demand will start coming back to the market. Two years of salary hikes and property price stagnation in the past one year has already cushioned some of the impact of high prices. This will also result in hardening of prices, especially for projects that are ready or are nearing completion.

    THE STRATEGY TO FOLLOW


    Despite factors in favour of a correction, property prices remained mostly stable in the past one year. So should you still wait for a correction? Most experts are of the opinion that a broad-based correction may never happen. Even if one looks at the most pessimistic view regarding price corrections, it is unlikely to be more than an average of 10% in select pockets in the metro cities.

    Window shop

    The first thing to keep in mind is that this is a very good market to bargain for discounts. Even if you have decided to wait for some time to see if the prices may actually correct, you should go out in the market and see what is on offer. It is still possible to get an apartment within your budget after the builder throws in some discounts. Chances are that before the market picks up, you may land a property that is either ready-to-move in or nearing completion.

    Check out the resale market

    Some of the best discounts may be available in the secondary market if you have enough money for a higher down payment. This is because many investors who have been stuck in a stagnant property market are looking for an exit route, even at lower margins. The advantage for the buyer here is that he is dealing with an individual instead of the builder’s marketing team. But this also means running around more and approaching more number of brokers to identify the right properties in the market and get the best deal. The resale market also comes with its own challenges of verifying whether the seller holds the title of the property or if the property is legal.

    Avoid new launches for now

    Unless you are looking at the established players in the market, it is better to go for a project which has something to show on the ground in terms of actual construction. The cash crunch over the last two years has resulted in many projects getting delayed or those of smaller developers being taken over.

    Don’t be in a hurry

    Though prices are unlikely to go down, they are also not going to shoot up in a hurry because the impact of factors such as low interest rates and higher salaries comes with a lag in the market. “I don’t see an upside in real estate prices for the time being. Maybe after three years, we would see an upside. If you stay invested for about 4-5 years, you would see an appreciation. Usually, there is an annual increase of about 8-11% in prices,” says Uday Dharamdhikari, CEO, Usha Breco Realty.
  • #2

    #2

    Re : Waiting for Property Prices To Fall? Don't

    I do not agree to some points in this article, but great share .
    Please read IREF rules | FAQ's

    Comment

    • #3

      #3

      Re : Waiting for Property Prices To Fall? Don't

      Originally posted by MANOJa View Post
      I do not agree to some points in this article, but great share .

      When something goes up ,lots of explanations for it comes up.

      Comment

      • #4

        #4

        Re : Waiting for Property Prices To Fall? Don't

        Originally posted by MANOJa View Post
        I do not agree to some points in this article, but great share .
        MANOJa bhai..which point you don't agree too?

        Comment

        • #5

          #5

          Re : Waiting for Property Prices To Fall? Don't

          no views, friends?

          Comment

          • #6

            #6

            Re : Waiting for Property Prices To Fall? Don't

            according to me if you are end user which means you are not a investor then you should not wait for prices to cool down. because of black money involvement prices will not fall sharply yes there may be some lil correction but for end user that house/flat is not ment to sell. there may be steep correction under the condition some strong RE bill comes and a strong bill comes for black money which is unlikely for atleast next 8-10 years
            but if you are a investor then you need to study the market and invest smartly.

            Comment

            • #7

              #7

              Re : Waiting for Property Prices To Fall? Don't

              Restricted supply - Could be true in Delhi but not applicable in Greater Noida/Gurgaon/CR/NE & even some part of Noida. Just pick any news paper and you see lots of builder are still displaying ads from last one year…

              This situation might be true after 5 -7 years but not now.

              Don’t be in a hurry - as per article, no upside in three years… who said this… has anyone checked Gurgaon/Noida rates and compare…

              Affordability - whenever you see such world “Affordable”…. Either location will be too far OR flat size will be too small

              Comment

              • #8

                #8

                Re : Waiting for Property Prices To Fall? Don't

                Same Article with Graphs!! Below Analysis Shows RE has No Price HIKE for 3 years from 2008-2010

                Will RE Repeat the History!! As Below Analysis GRAPH from year 2008-2010, to the upcoming years 2012-2014 ???

                No Price hike in RE (or even depreciation) during 2008 , 2009 , 2010 (See Below Graph). However Year 2011 is the year which Register good price hike and in some areas (like Gurgaon , IP/Vaishali , RNE , Noida E-Way/7x) it is confirmed more than 30% appreciation in price just in one Year 2011 (12 Months). What will be happen from 2012 to 2014????




                The last time Bharat Sharma went looking for a house that fit his budget of Rs 40 lakh was in January 2011. Prices were high then and so were interest rates.

                The same month, he came across reports about a possible correction in property prices in the next one year.

                The arguments were compelling. Property prices and interest rates were high, making EMIs unaffordable. Income growth had slowed down, job creation was on the wane, inflation was high and there was oversupply in the market.

                With everything pointing to property prices coming down, Sharma decided to wait. He is now back in the market looking for a property, with a slightly higher budget (Rs 42 lakh).

                But contrary to his expectations, prices have not gone down. In fact, they have risen. "The project that I was considering is now sold out and the others launched recently in the same locality are quoting at higher prices," he says. Why did property prices defy what the market pundits were expecting? What prevented them from falling?

                Continuing investor interest

                Investors are the lifeline of a cash-strapped developer. They are the ones who are keeping builders afloat even now.

                Pankaj Kapoor, managing director of real estate research firm Liases Foras, explains that compared to 1995, when there was shortage of liquidity in the market which led to a crash in the real estate sector, the situation now is quite different. "There are hardly any avenues which offer you safe returns today.

                The stock markets are volatile and gold prices are also at an all-time high. So, investors look at the real estate sector to park their excess funds. It is not the developers who would have to take a price cut but the investors," he adds. According to Kapoor, it is the investors who are instrumental in the property prices staying firm.

                "Besides this, there are a lot of venture capital firms which have bought huge stakes in realty projects. For the developers, it is a win-win situation. Since they have already cut down on their losses, they won't be losing much even if the rates come down a bit," he adds.

                However, in some cases it is also because of these investors that the builders cannot reduce prices substantially. "A big investor who puts in money at the pre-launch stage of the project is also looking to exit at a higher rate later," says a Gurgaon-based real estate broker. "If the developer reduces the ticket price, the investor will not be able to sell his properties in the market and, therefore, will not invest in the builder's projects in future," he says.

                Restricted supply

                One of the main reasons for residential property prices correcting only marginally in some locations or not at all in most, was the restricted supply of new projects. According to real estate consultancy firm Knight Frank, the pace of new project launches was severely crippled in 2011.



                During 2010, roughly 3.61 lakh residential units were launched across the top seven cities of Mumbai, Delhi NCR, Pune, Kolkata, Bangalore, Chennai and Hyderabad.

                However, only 1.72 lakh units came up in 2011, a decline of 52% over the previous year. The decline in new launches was sharper in certain locations, such as Mumbai, where prices were high and buyers few.

                For instance, just about 19,470 units were launched in Mumbai in 2011 compared with the 54,968 housing units built in the previous year.

                While fewer new launches were one reason for the restriction in supply, project delays also played an important role.

                The situation is likely to continue for some more time. According to property research firm PropEquity, nearly half of the 9.3 lakh under-construction residential units in the country, scheduled for delivery between 2011 and 2013, are likely to be delayed by up to 18 months.

                While reducing the number of new launches is a natural reaction from the builders in a slow market, developers also restrict the number of projects in the market by other means. Some builders have recently started inserting restrictive clauses in the sale contracts that prevent buyers from selling the house before a specified time (usually one year of buying).

                While the builders claim that they are doing this to prevent speculators from buying into the projects, the real reason is that the developer does not want the housing units to be out in the market at a lower price (by the seller) in times of a slowdown.

                "This is primarily to have control over the time period before their property comes back in the market for sale. It would also deter speculators to offer the property at a lower price than what the developer is offering," says Ravi Goenka, advocate at Mumbai-based Goenka Law Associates.

                Rising construction costs



                Almost all builders will today quote this as one of the main reasons for increasing property prices. Though the impact is often exaggerated and may sometimes look like an excuse, the fact is that the cost of construction and materials has actually gone up in the past one year.

                "With the cost of raw material like cement, steel and other inputs going up by 25%, it is just not possible for developers to reduce the cost, unless the government offers some subsidy," says Niranjan Hiranandani, managing director of Hiranandani Group. The incidence of taxes, among the highest in the world at nearly 30-32%, Hiranandani points out, is also coming in the way of a price reduction.

                Multiple intermediaries

                In many markets in North India, the developer is no longer the one selling his project to the retail buyers. There are underwriters, big brokers, brokers and sub-brokers in the market who have entered the sales flow (see From the seller to the buyer) and who have their own margins to take care of before an apartment reaches the end-user.



                The intermediaries also affect the resale market. "The estate agents are the first point of contact who influence the decision making process of both the buyer and the seller," says Ganesh Vasudevan, vice-president, , a real estate portal.

                Builder cartels also at work

                While on the one hand builders complain of cement and steel cartels pushing up the construction cost, they have now started operating their own mini cartels in smaller markets. They fix the quoted price as a group in a location. "There is usually a pattern in which the developers increase prices around the same time," says the marketing head of a real estate company.

                It's another matter that the differentiation in price happens in the form of discounts being offered to serious buyers. When 37-year-old Vasanta Sobha Turaga from Hyderabad started scouting for a property in the prime location of Banjara Hills, she found it tough to get one in her modest budget of Rs 30 lakh.

                "Though there is virtually no demand in the market, the developers just won't let the prices come down. Many brokers do agree that they hardly manage any business, but the developers work in tandem and just won't agree to sell the property with a price cut," says the conservation architect.



                Unit sizes have shrunk

                Another tactic that builders are using to maximise their returns is by reducing the size of the units. The standard apartments being sold today are far smaller than the average unit sold a few years ago.

                "The per square feet value remaining constant, what has shrunk is the size of units in places where density norms were eased, such as in Noida, and where FSI restrictions have been rejigged," says Jayashree Kurup, head, digital content and research, , a real estate portal.

                By building smaller flats the builder not only makes more money since he is selling more units, his expenses on the common facilities also remains the same despite the rise in units. Builders have also begun to increase the margin between the super area (which he quotes while selling) and the carpet area (the usable area that you get).

                Why you should not bet on a correction

                Real estate is unlike any other investment in many ways-the entry barrier is high, liquidity is low and reliable market information is rare. It is different from other investments also when it comes to a correction. When it comes to the primary market, builders rarely ever decrease the price.




                In case of a cash crunch, the first resort is attracting buyers by offering discounts, which varies from buyer to buyer. This means that you cannot point to a new lower base price.



                If the builder is really short of cash, then instead of reducing the ticket price of his existing project, he launches a new one with different specifications at a lower price point.

                But this too is not technically a correction since the project and specifications are different.

                The same holds true in the resale market. Unlike in stocks or mutual funds where you can track prices or NAVs, you do not have access to a reliable valuation of your property on a given day or month.

                Best locations get sold out first

                Getting a good property is also about getting a good location-both for the project as well as for your apartment within a housing project.

                And the fact is that the best locations get sold out first, such as park-facing corner apartments.

                One of the major reasons for prices holding up in places close to business districts or work places is that consumers do not want to travel long distances for work.

                People are willing to pay a high price to stay nearer their workplace. Though there are projects available farther away in the city periphery, the clamour is for the projects closest to the city's business districts. This means that even in a lukewarm market when there are very few buyers, the best locations and projects will be the first ones to be picked up.

                Affordability will catch up

                As our survey shows, a majority of the buyers would be back in the market if they can afford the EMIs. With interest rates set to go down (a few banks have already brought down their base rates), some of the latent demand will start coming back to the market.



                Two years of salary hikes and property price stagnation in the past one year has already cushioned some of the impact of high prices. This will also result in hardening of prices, especially for projects that are ready or are nearing completion.

                Rentals have been going up

                This is especially true for the bigger cities where there is a significant chunk of floating population. As buyers continue to be on a wait-and-watch mode, the rental segment of the market has been reaping the benefits. Residential rentals, especially in locations closer to work places, have consistently risen in the past two years






                .
                Last edited January 28 2012, 11:00 AM.

                Comment

                • #9

                  #9

                  Re : Waiting for Property Prices To Fall? Don't

                  The writing on the wall is bold and clear - Real estate prices across the country are overwhelmingly higher than their real worth, and prices will fall substantially.

                  Ironically almost every body can read this message on the wall, yet there are many who say - Oh, this is written by mistake- maybe, it means something else. And funnily enough, there are still a few who believe that this writing on the wall means that prices will go UP

                  Comment

                  • #10

                    #10

                    Re : Waiting for Property Prices To Fall? Don't

                    Full article in PDF format... with graphs...
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