Popping the Myth of the Property Bubble
Fears of the real-estate bubble bursting are exaggerated. But the slowdown presents an opportunity for the smart buyer.
Most Indians believe that property is the ultimate investment. After
all, haven’t home prices been heading only one way — up? For instance,
prices in Chennai have trebled since 2007. Recently though, there are signs of a slowdown. Data from the National Housing Board (NHB) show that property prices fell in 22 out of the 26 residential markets in the last quarter. Buyers are staying away from booking homes in many recent project launches. The shift in mood seems triggered by high home loan interest rates and steep price escalation in recent years, which has made homes unaffordable in some markets. These were not a big concern in the past, thanks to a booming economy. But buyers are now more risk averse as the economic slump has impacted salary hikes and job prospects.
But do these justify talks of a bubble burst? The short answer is: No.
Buyer interest in new homes remains quite healthy in most markets, even
if transactions have slowed. Price correction will be limited to a
handful of markets. In such an environment, here is what a buyer should
do.
The ugly
To start with, watch out for the most vulnerable segments of the
property market and avoid them. Right now, these include localities with
a high level of ‘speculative’ buying, Tier-3 markets and luxury homes
in certain cities.
If property prices don’t appreciate, those most likely to exit the
market quickly are speculators or second/third-home buyers. After all,
such buyers are looking to make a quick profit rather than hold on to
assets. So, markets with rampant buyer speculation may see sharper
corrections with investors selling their holdings. Experts believe that
in localities such as Dwarka Expressway in the National Capital Region
(NCR), speculative buying is sizeable, as much as 50 per cent of the
total.
Tier-3 cities may find the going tough for quite awhile due to excess
supply of new homes. For instance, Nagpur has around a 10 year supply of
housing units. Coimbatore, with an annual demand for 500 units, churns
out 7,000 units every year, according to Om Ahuja, CEO, Residential
Services, Jones Lang LaSalle India. Lack of employment growth in these
markets is also a stumbling block. These markets are likely to see a
price correction as well as developers exiting.
Price corrections are likely to be steep in the luxury segment, where
the lure of high profit margins for the builder has created an
over-supply. For instance, in Pune, mid-income housing remains robust
but demand for high-end property is sluggish. Specific projects that do
not fit the needs of buyers in the market are also likely to see steeper
correction. For instance, a few builders in Sriperumbudur and along the
ECR, near Chennai, are left with a large inventory as many projects are
not meeting buyer expectations, with respect to features and prices.
The bad
Some residential markets and segments may see milder price corrections or prices moving sideways.
Economic or political concerns in the region may keep prices depressed
in cities such as Hyderabad and Kolkata. For instance, the depressed
Hyderabad market is looking for a firm resolution of the Telengana issue
before sales pick up. Slowdown in a particular sector can have an
impact too. For instance, the lull in the automobile sector has affected
Pune, and a lull in the manufacturing sector has hit Coimbatore.
These trends may offer an opportunity for home buyers to negotiate
attractive prices. A builder in dire need of cash to complete a project
may offer price cuts, as delays reduce profits in a market where prices
are not increasing. Builders with high debt may be open to selling
completed properties at lower rates. Such deals, although offered only
by few builders, may result in lingering price pressures.
The good
Buyer sentiment overall may be down, but far from out. Data from a
property website suggests that following a decline, buyer interest in
new apartments has increased by over 30 per cent in all major markets
over the last six months. This is particularly true in markets such as
Bangalore, where the fall in rupee has helped buoy the fortunes of IT
companies and, as a result, the expectations of their employees. JLL
says Sarjapur Road, Outer Ring Road and Whitefield in Bangalore, and
other areas where IT companies are in close proximity, will see price
appreciation.
Low supply may help price increase in certain markets. For example, the
Central Business District (CBD) in Chennai has a dearth of supply and
properties are being lapped up at a brisk pace, according to Sunil
Rohokale, MD & CEO of ASK Group.
Price pull
Even while house prices increased overall, home affordability, measured
as the ratio of property price to annual income, has been stable. Data
from HDFC shows that affordability was around 4.7 as of March 2013, a
level that has been stable since 2010. Mudassir Zaidi, National
Director, Residential Agency, Knight Frank, says that, on an average,
home mortgages are paid out in six to eight years. The growth in annual
savings may continue to help home price appreciation.
Increasing construction and financing costs will have an impact as well.
JS Homes, a Bangalore-based developer, says that the company’s cost of
construction is now around Rs 1,500 per sq ft. Poddar Developers, a
Mumbai-based developer of affordable housing projects, says that land
prices have gone up by 15 to 40 per cent.
All in all, if you are looking to buy property, be selective. Keep away
from the bad and the ugly. There is plenty that is good and which is
still available for sale.
by Meera Siva for The Hindu Business Line
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