Why property prices never come down?

Why property prices never come down?

Why property prices never come down?

Recently, a well-known real estate developer, while addressing a press briefing, said that his next project would constitute of special customized villa properties. When asked in what price band would those properties be, he responded by saying that the project would cater to uber rich of the country and would be sold by invitation only. “These villas will be priced high,” he said. While there was no logical reason behind the pricing of the villas little did he realize that the announcement will further raise the average property price in that area. The present average price in the city is around Rs. 4,500-5,000 per sq ft. and it is likely that the project would be launched in the tune of Rs .10,000 per sq ft.

While there is no regulation in the country to put a check on rising property prices, unrealistic product pricing of units like the one cited above, speculation in the market and other local factors contribute to the rising of property prices in India. So why is it that the property prices in India never seem to come down? Here is a list of some of the factors that push the rates up.

1. Huge housing demand-less supply: A huge demand for housing is to be blamed for the rising property prices. India has a housing shortage of around 18.8 million units. This demand is fulfilled with a small supply limited to only key cities. So while the prices in metros remain high, tier II and III cities are also witnessing hike in rates due to less supply.

2. Scarcity of land: By far metro regions in the country have very little land left for any new development. It is for this reason that the land prices, like any other property segment, have gone up manifold in the past one decade making it difficult for the developers to bring out low cost units. The land available in the neighboring suburbs has also become costlier because of the spill-over effect of the metros.

Faulty product pricing: It is usually seen that over the past one decade property prices have significantly moved up. However, in absence of any regulation, there is a no standard format to fix up the rates in a particular project. As seen in the introductory example, developers do not follow a set pattern for raising the property rates. Another example could be that when the NCR Planning Board approved the Greater Noida plan, the developers in Noida Extension increased their property rates by Rs. 500-600 per sq ft. At present, the average rate in the region is around Rs. 3,200-3,300 per sq. ft. from the launch rates of Rs. 1,500-1,700 per sq. ft. in 2009-2010.

3. Number of approvals: Developers lobbies such as Confederation of Real Estate Developers' Associations of India (CREDAI) and National Real Estate Development Council (NAREDCO) have been demanding a reduction in the number of approvals that developers have to get before building any project. CREDAI's president, Lalit Kumar Jain, at various forums, has often said that number of approvals leads to project delays. “If we create a single window clearance mechanism, we can reduce the rates drastically,” he said. According to rough industry estimates, developers have to take around 35-40 different approvals before the launch and actual commencement of project. This further escalates the input cost for developers taking the rates further up.

4. Investor driven market-multiple price points: The under-regulated Indian realty market is dependent largely on early investors and consultants, who buy a bulk of inventory either before the launch or at the initial stages of the launch at special discounted prices. The over indulgence of investors also leads to multiple price points in the same region and within the same project.

While the developer launches the same project at an ‘official’ rate, the same investor then starts selling his share of units at a different rate. Although, it is beneficial for the consumers, the developers keep holding the official rates for future. In this vicious cycle of transactions, developers and investors tend to gain—while the developer is able to sell his units, investor is able to sell making some profit. The entire system makes it difficult for even developers to lower their rates beyond a point. Therefore, there is no correction after the launch of rates.

5. High interest rate scenario: In 2011, the government revised the interest rates around 13 times. The rising inflation and high cost of raw materials have been impacting the operational cost of developers and is affecting home buyers'’ affordability.

Other things remaining equal, high interest rates lead to lower activity in the realty space. Theoretically, the prices should fall. However, it also depends on the stage of interest rates cycle the economy is at. If markets expect interest rates to fall, there is a chance that developers and sellers would probably like to wait. It is for this reason that the developers are still holding on to their old rates and home buyers are now fence-sitters. Thus, prices never seem to go down. Going forward the rates will soften only slightly.

Last Updated: Tue Jun 11 2013

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