Real estate prices in India face slowdown

Real estate price in India is stabilizing and is facing steady slowdown especially in the metros. I have taken Bangalore as an example in this blog but other places too are affected by similar concerns.

In Bangalore the real estate price is going crazy, though none of the real estate agencies would like to agree to this fact.

Property prices moves due to the basic principle of Demand & Supply

When demand is high & supply low prices will go up

When demand is low & supply is high prices will come down

For example let’s assume that somebody has bought a property for Rs X and he is trying to sell the property (say after a year), there can be three options, assumption being that the owner is in need of money and cannot wait for more than 3 months to sell the property.

• When the property prices are zooming everywhere> Here the owner will try to add as much premium to the property as possible, wait for three months and sell off in the last month at the highest bid ( RsX + RsY)
• When the property prizes have stabilized > Here the owner will not be able to sell the property at a premium due to market stabilization & since he might not want to sell at a loss, he will try to get at least the same amount he bought the property for (Rs X = RsY
• When the property prices are going down> Here the owner will try to sell the property at the least profit or at the least loss. (RsX-RsY)

There was a news in one of the leading news papers last week that there are close to one hundred thousand completed flats without occupancy and another hundred thousand will be available for occupation by the end of July. But are there enough buyers in the market compared to the supply? The demand it seems is only for fifty thousand units.

Bangalore seems to be in the midst of low demand & high supply. This can be attributed to the facts that due to the sudden growth of Bangalore, in the last few years, lot of builders have jumped in to catch the opportunity of building residential apartments thinking there will be lot of employment and increase in salaries & hence demand for housing. Last few years were great for Bangalore as IT was doing well and other industries like banking & retail were expanding.

Today due to the economic cycle downturn the jobs are being cut and recruitments are put on freeze, salaries are stabilized and bonuses reduced, not only in IT but in other industries too. The impact of this is felt in the local property market.

Stock market downfall too has added more trouble to the real estate market as it is reducing the purchasing power. Indias sensitive index has shed 30 percent this year. Real estate stocks had a major hand in leading the sensex to the worst six-month performance in at least three decades, with the Bombay Stock Exchange Realty Index slumping 59 percent this year.

Non resident Indians (NRI) were a major segment who used to invest into property either as investment or as a place to stay when they return to India. Today for investment purpose NRI's are not looking at India as in foreign markets, the property prices have gone down drastically due to the sub prime & credit crisis and those markets look relatively cheaper with a lower price to earnings ratio compared to India.

The potential to make higher return lies there now. This ideally means that money flow into India for buying property might come down too. Loan rates of various banks too affect the demand for the property. In India loan rates are controlled indirectly by the government. Today we are sitting on a WPI inflation of close to 11.3 %. If the government here has to control this inflation they have to suck liquidity from the markets with their favorite weapons like CRR, repo rate, reverse repo etc. The loan rates move depending on the movement of these rates. Today due to the high inflation figure, loan rates might go up and lot of people will opt out from buying a property due to high EMI's. This will again lead to a decrease in demand for housing.

Some of the real estate research agencies are of the view that there seems to be a possibility of further downside within six months and it makes sense to wait & watch as of now.

Whatever the condition of the economy, one thing we should not forget is in the long term property (land) is a great investment as it is the only asset class which cannot be produced. Though there might be a 18-20% correction across in the short term ( say 6-8 months) due to the factors mentioned above ,a wait, watch and a definite buy make sense for the long term.

Some factors which inspired me to think why property prices might correct:

• Smaller developers offering huge price discounts.
• Cost of secondary sale property coming down by more than 10 %.
• Sudden increase in the attractive schemes by builders to lure investors
• Builders giving huge discount on upfront payment
• Rising inflation and interest rate.
• News of demand supply mismatch especially in Bangalore.

Just a point of view