The Endless Wait for Property Prices to Fall will never end. From my childhood days, i kept reading in Newspapers that every Middle Class Indian aspire for “Roti, Kapda aur Makaan” and wait for Property Prices to Fall. Today, i would like to modify this slogan to “Job, Gold aur Makaan”. Out of 3, “Makaan” is still a common factor & an illusive aspiration for Indian Middle Class. Fight for Roti and Kapda is over for Indian Middle Class and no longer aspiration becoz its very well within the reach of middle income group. Owning a House or Property is still out of reach for million of Indians…
Circa 2004, After getting a job i decided to buy a house therefore i decided to keep a close watch on Property Prices & wait for Property Prices to Fall. I observed that in Media there are 2 Lobbies, one which is pro builder and second is against builders. I fell in trap of second lobby, which was against builders. This media lobby always projected that property prices at current level are very high and prices will fall in future.
I left many lucrative deals @ 1200 Rs psf in 2004-2005 & kept waiting for property prices to fall. Everytime i decided to purchase a property, i thought prices are high and will fall but prices never fell and my wait for right price goes on…. In 2011 finally i decided to come out of this mindset and brought a property @ 6000 Rs psf i.e. 4 times more than 2004 level. It implies that in 7 years prices increased by 5 times. The flat which costed approx 25 Lac in 2004 was costing 1.25 Cr in 2011. It caused me near Heart Attack that i lost an opportunity of 1 Cr profit. Anyways my e.g. was one of case & not in all cases, prices increase by 5 times. Since i keep a close watch on property prices across India, till date i have not seen property prices falling from current level except in the case of Noida Extension & that too after court verdict. Property prices might not have increased 5 times in all cities but definitely multiplied by 2 or 3 in all Metro’s and Mini Metro’s.
My observation is that Property prices are always range bound and never go below lower bracket of range e.g. Current psf Price in Vashi area of Navi Mumbai is 10k but u might find properties in the range of 9k psf to 11k psf i.e. within the range of 9k to 11k psf but don’t expect prices to go below 9k psf except distress sale or properties with inherit disadvantages like south facing property or property near graveyards.
You must be wondering why property prices don’t fall, there are reasons behind the same. I am listing down the same
1. Circulation of Black Money: Though lot of steps have been taken to weed out Black Money from Real Estate market but still Black Component cannot be ruled out 100%. Normally 20%-30% cash/black component is involved in any property transaction whereas in Delhi & NCR this component can be 50-60%. Secondly becoz of this cash component, Middle class find very difficult to buy a house. For a 1 Cr house, 20 lac cash component and then 20% self contribution as Home loan available will be only 80% of sale value excluding stamp duty etc. Therefore any individual has to arrange for approx 40 lacs from own pocket to buy a 1 Cr flat i.e. 40% of total amount.
2. Land Cost: Land is a natural resource therefore its scarce. Land price increase much faster compared to property/flat price therefore many people buy land for investment purpose rather buying a property. If Land cost will increase than definitely, it will increase the price of a property.
3. Construction Cost: Construction cost include Labour Cost and Cost of Raw Material. With increasing Cement and Labour Cost, Construction cost has increased drastically in last few years. Today in a Metro City, construction cost psf is between 1800-2000 psf whereas in small towns its 1200-1500 psf.
4. 20% investor’s control 80% of Real Estate Supply: Indian Real Estate market is dominated by Investor’s not by end users. These investor’s are Businessmen, NRI’s or Politicians. Investor’s control approx 80% of supply which in turn increase the rates.
5. Cartel by Builders: Cartel means when all the competing firms join hands to artificially jack up the price. If builders decide that they will not sell below certain price level therefore it increases the price. Secondly in many cases builder keep increasing the rates unilaterally to show that his project is in great demand whereas in reality its not the case. Recently, one of my friend bought a 1500 psf flat directly from builder for 60 Lacs whereas many owners in same complex are selling/transferring it for 48 Lacs becoz they don’t find buyers whereas builder uses his marketing tactics to sell the flats. In short, supply is more than demand. The difference between builder rate and resale price is 12 Lacs & builder has yet to start the registration process.
Now you must be wondering how come builder afford to keep unsold inventory. Answer is very simple, smart builders follow a cyclic process of completion e.g. if a builder launched project A then builder will 1st recover his cost and book his profit upfront from sale of project A. Now in order to complete project A, builder will launch project B and from project B sale, builder will complete project A. Then to complete project B, builder will launch Project C and so on..It also explain the delay in projects. Without getting commencement certificate from local authority, builder cannot sell the project therefore all the excuses of project delay like delay in approval etc are false. If builder is not able to sell project C then he will not be able to complete project B on time.
The complete real estate business is very complex web to understand but in short, i would like to conclude that you can never expect property prices to fall below range as mentioned by me. Any delay is opportunity loss and if you are getting a deal @ 5000 Rs psf today then tomorrow you might need to pay 5500 Rs psf for same property. Let’s not wait for Property Prices to Fall & grab any good deal coming our way.
Copyright © 2011-2012 Nitin Bhatia. All Rights Reserved.
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