One of the factors why some people are deferring the purchase of their dream homes for some time now is their belief that the prices of residential units will fall further in the wake of the current slowdown in the real estate market. If you are also one of those, then don’t delay your purchase just because of some belief, but only after doing a proper analysis of the current market scenario.
It is true that real estate is facing a downturn for a long time now and has been further hit by the demonetization drive. Statistics reveal a downfall of as much as 40% of monthly average housing sales in 9 of India’s top cities as buyers postpone their purchase in the hope of price reduction post the demonetization exercise. At last their patience did pay well and a drop in property prices is evident. Not only direct purchases from developers have reduced, there has also been a downward trend in the re-sale market as well. Some of the factors that have been detrimental to the re-sale market are as follows:
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First, it was the demonetization move which restricted all cash transactions and in turn led to an outright price reduction of 15% to 30% of the property cost, resulting in huge inventory pile-up with the real estate developers.
“A lot of investors had invested in the residential segment with an expectation to make huge profits in 3-5 years of their investment. However, if the current situation persists, this is unlikely to manifest in the future. As every investment comes with a limited ‘holding capacity’, these buyers shall soon face immense pressure to exit from the market and generate returns from their investment. We foresee an end to ‘holding capacity’ by the 3rd and 4th quarter of 2017, which can be termed as the 2nd wave of plummeting property costs,” says Avnish Yadav, Deputy GM-Residential Services, Colliers International India.
Secondly, the government has unveiled new policies focusing on the affordable housing segment that are likely to induce a further drop in the sale of existing inventory. Besides, demonetization has led to a drop in home loan interest rates. However, this has not been to the expected levels which could have pushed the real estate industry in the north direction.
Thirdly, the current sentiment in the market is also not in the favor of investing in the real estate market. Hence sales will happen in re-sale or secondary market. Re-sale is hurriedly gaining momentum in the property market wherein the buyer can cash in on the advantages of the current turmoil. Newly-launched properties are overly hyped by the developers to bring in higher profits. On the other hand, the re-sale market is the real indicator to gauge the value of a property in that location.
“Property prices have been stagnant for almost 3 years with a faint scope of revival in the near future. Given this situation, there are many buyers who had bought their homes a few years back and are now willing to cut their losses and exit their investment. With reducing demand, these buyers have to sell the property at a lower cost which gives the first home buyer more room to negotiate. For instance, an under-construction property at a good location can be fetched at as low as 5-10% of the market price, whereas a bad-location property can be fetched at as low as 15-20% of the price,” says Yadav.
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In the current market scenario, all factors point towards a fall in the secondary market pricing until the industry gets a boost in the form of foreign investments, further reduction in home loan prices and reduction in home loan tax benefits for the end consumer.
Some industry experts, however, believe that fluctuations in realty prices are guided by localized market dynamics.
Anuj Puri, Chairman & Country Head, JLL India, says, “Residential property pricing and the factors that influence it in India are a very dynamic phenomenon. This is not surprising in such a vast country which is still developing. As such, some micro-markets within a particular city – usually the central locations – will do very well due to short supply and high demand, while others – usually the emerging suburbs – can see oversupply and lower demand due to infrastructure deficit or adventurous pricing strategies by developers.”
Keeping this fact in view, whether prices will rise, fall or remain stagnant, therefore, pertains to very localized market dynamics. “On the whole, we have seen a drop in pricing of resale properties in most suburban locations due to the demonetization effect. Primary sales have been far less affected and prices in this segment have not dropped significantly, as there had been several price reductions in the past beyond which developers cannot go. That said, it is still very much a buyers’ market, and customers’ power to negotiate is still quite high,” says Puri.
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Whatever be the case, some developers believe that because of the prevailing market conditions as well as the various initiatives taken by the government, the next 3 to 6 months would be the best time for home buyers to buy their dream homes as the coming 3 to 4 years will witness an unprecedented boom in the housing market, accompanied by a rise in prices. This means that while you can still wait for some time, but nothing can be said with certainty about the future scenario!