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.
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.
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.
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.
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.