Facts Vs Speculations about drop in real estate market

Instances of speculations indicating drop in real estate market:

1.     2008-10: During sub-prime crisis which hit developed nations in 2008 and India in 2010

2.     Early 2016: Law for Real Estate Regulatory Authority

3.     Nov 2016: Demonetization of Rs. 500 & Rs. 100 Notes

Now let’s quickly visit the Facts:

1.     2008 – 2014: Contrary to the expectations, property rates have steadily gone up (yes, increase was not as magnificent as it was from 2002 – 2008). In fact it doubled in or around 2014 as compared to what it was in 2008.

I have seen lot of customers who were sitting; on fence in 2008 - 2010 speculating the rate drop had to buy the same property for double the cost.

2.     Early 2016: As soon as government announced the act to regulate real estate sector, media started speculating drop on following points:

a.     Huge inventory: Due to substantial profits in the boom period which started from late 90’s and continued up till 2012-14; supply increased multi fold where as demand couldn’t keep up the pace.

b.     High end apartments: entire real estate sector was focusing on making high to ultra high end apartments where as no one paid any heed to the dire need of affordable housing projects.

Even though demand-supply mismatch was on all time high; except for the small unorganized and noob developers or the developers operating in the fringe areas of the city; organized builders held on to their rates.

They surely came up with schemes and tie ups for zero down payment / no EMI till possession / free rent till possession etc which basically enticed or forced customers to buy by giving some respite a. in payment or b. in time to make that payment. With this by holding the price at same level; they ensured the sale.

3.     Nov 2016: With government’s surgical strike on black money; speculations are rife about drop in real estate prices. But let me tell you reasons to counter this argument:

a.     Drop in supply: With situation explained in point no 2 above, there are fewer new launches and thus supply side has finally started taking cognizance of demand side.

b.     Lesser project sanctions: It’s an open secret that no real estate project could start without bribing government officers. In absence of black money with builders to bribe them; lesser no of projects will get through red tapism of  Government babus which will further reduce the supply.

c.      Cheaper loans: With huge money getting parked in banks, interest rates on loans are sure to come down. Housing loans would be no exception to this.

d.     Unattractive interests on FD: Higher the money with banks, lesser is the need for more money from retail investors like us and lesser would be the interest rates for FD’s / RD’s. Thus making FD’s unattractive for investments.

e.      Volatile gold prices: Gold was considered most liquid investment but with frequent ups and downs in its prices; it has become less reliable option for investments.

With further push from government against black money, gold smiths might have to stop paying in cash for the gold sold by the retail investors like us; thus further reducing the liquidity and major reason for gold investment.

f.       Profits is the motive behind any business and not charity: Let’s look at the cost implications of typical real estate project in the newly developing real estate pockets of Pune:

Head	Approx Cost in Rs. / sq. ft.	Remarks if any
Land Cost	1000	For a land not laying in the heart of the city (includes its price and necessary permissions and higher FSI bought with TDR)
Construction Cost	2500	With customer’s expectation of top end specifications and increased prices of raw materials; construction cost has gone up substantially.
Admin / Running Cost	500	Includes office, staff, marketing etc costs necessary for smooth running of the business.
Total	4000

So now don’t you think any builder would charge 1000-2000/sq. ft. more as his profit and provision for future projects?

Thus this increases per sq. ft. rate to 5000-6000 which is a norm these days.

g.     Builders who don’t take black money: Yes; even they exist! From past 6 years I am working with a builder where not a single naya paisa is taken in black and we are surviving this way. I also know quite a few builders in Pune who strictly follow this principal.

With current scenario builders who used to accept black money will also start accepting white money as losing a client would be far worse than losing few lakhs (per customer) in black.

h.     Presstitutes: Press is ought to write catchy headlines in newspaper. You must have read ‘Real Estate prices to drop by 30%’ in all the newspapers. But if you thoroughly read the entire article, you will understand that they are talking about a sharp fall in secondary markets (resale apartments) where black money transactions are very common.

Now the next question would be; will there be no impact of the government decision on real estate sector? I would answer this question in following points:

1.     Resales and land deals: As explained above resale and land deals where black money transactions are rampant will be hampered.

2.     Fresh sales: As explained in point no. 2; builders who have holding capacity will come up with some enticing offer without reducing the costs. The new launches will see small apartments with moderate specifications so as to reduce the total package.

Small builders will be left with no other option but to sale at discounted prices.

3.     Rising incomes: Real estate prices will plateau for few more years and by that time income of an individual would have increased to such an extent that real estate investment again becomes affordable to him.

So what you should do now?

1.     Investors: Refrain from the market as real estate won’t see phenomenal growth in near future.

2.     Actual user: I don’t foresee massive deep in real estate market unless and until this sluggish cycle stretches beyond couple of years and builders are forced to book the losses.

Avoid fancy projects with high level of automation / high end specifications / long list of amenities as you actually don’t need / use all these fancy features / amenities. If possible go for a single building project with no amenities like pool and gym as hardly any person in a family will use these amenities throughout the year.

P.S.: Above article is the compilation of views / thoughts of people employed in real estate sector and you would relate to it with a simple test of logic or common sense.

Few articles from Rediff supporting this view: why-you-should-buy-your-dream-home-now
                                                                           i-dont-see-real-estate-prices-coming-down