Immediately after demonetization, I shared a post, Impact of Demonetization on the Property Market. The key takeaway was that property prices will correct up to a prevailing black component in each area. Secondly, I mentioned that there will not be any impact on the end user markets. Post demonetization, the buyers are in a fix whether to buy a property or wait for some time. I can conclude the same based on the no of queries received by me in last few months.
The greed and fear are playing a major role in the current scenario. It’s a mind game that is played by the builders, property agents etc. The property prices have not corrected as anticipated or expected by the buyers. Does that mean that there is NO IMPACT of demonetization on property market? The Answer is NO. There is a deep impact but in laymen terms, so far the builders have absorbed this impact. I was reading some news report that stated that property registrations have dropped by more than 40%. In my opinion, this fig will increase drastically as it does not account the pre-demonetization property deals matured after demonetization. The no of new queries almost halved. These figs may vary from city to city.
On the other hand, Builders successfully portrayed to the buyers that there is NO IMPACT of demonetization on property prices. Recently, I received a query from one of the readers. She mentioned that post demonetization the property prices dropped 15% in her locality but is now at the same level as during pre-demonetization period. The similar input was shared by many other readers of this blog. Therefore, we can conclude that initial knee jerk reaction is over. Now you must be wondering then why there is NO IMPACT on property prices? Let’s check out
Five Reasons Why The Property Prices Are Not Decreasing Post Demonetization
1. High Commission/Freebies to Brokers:
Before demonetization, the commission of brokers was fixed at 2% or less than that. During my recent interaction with brokers, I observed that they are now offered a commission as high as 8% to 10% from builders. It can be either a direct payout or freebies in the form of foreign holiday / high-end mobile phones. The freebies have high perceived value compared to direct payouts. One of my known brokers was carrying high-end iPhone and he told me that he received it for closing a deal in Project A.
In short, builders reduced the property prices by 6% to 8% but they preferred to pass the benefit to brokers/real estate agents instead of buyers. The reason being any direct decrease in property prices will have a ripple effect on the property market. It may also trigger panic selling like a stock market. Lastly, there is a cartelization by the builders to control the property prices. In fact, in Joint Development Agreement with the landowner, the builder restricts the landowner to sell his/her share below builder’s price.
2. Price Assurance / Guarantee Scheme:
Post demonetization, a new trend has emerged wherein builders are providing price assurance/guarantee to the potential buyers. For example, one of my client Mr. Rastogi bought a property in Gurugram at Rs 4800/= psf. A clause is included in the agreement/allotment letter that in future if builder sells the property at price lower than this then the builder will offer the same to price to my client. The same trend is observed in the other hard-hit markets like Mumbai, Noida etc. It is another major factor restricting the decrease in property prices.
My take is that this clause is an eye wash. Builders never reduce the property prices directly i.e. in their rate card. There are a hundred other ways to reduce property prices. One of the most common ways is that property is sold through marketing agencies at lower rates. Besides that in another instance builder offered an indirect discount like home furnishing worth Rs 10 Lac to one of the readers of the blog. Therefore, you can expect an indirect decrease in property prices.
3. Interest Subvention Scheme:
Recently, I saw a full page ad of one of the most reputed builders. The builder is offering home loan interest at 2.99%. In reality, the interest rate is 9% only but the builder will bear balance interest rate i.e. 6.1%. The most popular scheme is NO Interest till possession. I discussed subvention schemes in my post, the most popular subvention schemes. Personally, I don’t suggest purchasing property under subvention scheme. It is very risky. You may check my post, 7 Risks associated with the subvention scheme. Lastly, these schemes are offered by 2nd rung housing finance companies, not by the banks or reputed HFC’s.
In my opinion, if any subvention scheme is offered to the buyer then instead of opting for the same, the buyer should calculate actual financial benefit passed by the builder. After doing his homework, the buyer should demand equivalent financial benefit as an upfront discount. For example, if I am buying a property worth 60 Lac and builder is offering NO EMI till possession. I will calculate the amount to be paid by the builder to HFC assuming the project will be completed on time. Let say the financial benefit is 4.8 Lac i.e. 20k EMI for 24 months. Therefore, I will request the builder to adjust the same towards final cost & net consideration value should be 55.2 Lac.
4. Fence Sitters:
The builders/agents/brokers are predominantly targeting the fence sitters by projecting that demonetization will not have any impact. It creates fear in the mind of the fence sitters to miss the bus i.e. property prices may start increasing. Thanks to intelligent marketing as I explained in point 1, 2 and 3 of this post.
Moreover, the media is indirectly helping the builders by projecting that demonetization will not have any impact on the economy. It is true but let me clarify that I also explained the same point that major impact of demonetization will be on sectors with dependence on black money. The real estate is one such sector but in the overall scheme of things, real estate and such sectors cannot impact the economy in a major way. To conclude, the impact on the real estate sector will be major but it will not impact the economy in a big way.
5. Past Leads:
The builders/brokers/agents are now trying to convert the past leads. Last year, during Feb and March, I enquired about properties in Mumbai and during Aug and Sep, I checked some properties in Delhi. Trust me all the brokers/agents/builders whom I contacted called me and offered a discount. The average discount is around 15%.
The similar experience is shared by the many other readers. It is good marketing practice. Based on my interaction with some of the brokers, they are able to convert 5% to 10% of past leads. Quite interestingly, in some cases, the brokers are passing their increased commission as I shared in point no 1 to past leads without the knowledge of the builder. At the end of the day, It is a win-win situation for all.
Words of Wisdom:
Last week, I was reading a booking on investments and one of the key learning was that patience is the key. In my comments whether to buy a property now or wait, I am suggesting readers wait for 6-9 months. In my opinion, the prices will definitely correct equivalent to the black component before demonetization.
One of the readers from Mumbai was offered a price of Rs 56 Lac in Dec’16 after demonetization. The pre-demonetization rate was 58 Lac. He offered 50 Lac due to budget constraint but he was not willing to let go the property. The reason being his family liked the same. I suggested him to have patience and wait. I assured him that he will receive a call from builder’s end. Last week he received a call from an agent who offered the same flat finalized by him for 50 Lac :).
Always remember patience is the key and currently there are NO triggers that point towards the revival of the real estate sector. Therefore, negotiate hard because it is your hard earned money.
Copyright © Nitin Bhatia. All Rights Reserved.