Real estate prices not likely to see correction any time soon: Report
Residential units in many cities across the country today cost same as they did over two years ago
Residential real estate prices have remained stagnant for more than two years now and are unlikely to see a major correction any time soon, said Magicbricks.com’s latest Price Trend Report. The Indian real estate market has been stagnant both in terms of transaction activity and capital value of real estate assets. Residential units in many cities today cost the same as they did over two years ago.
In fact, when inflation rate over the same period is taken into account, the average price has actually fallen below the price prevalent two years ago. Therefore, while the prices may not have explicitly gone down, the stagnation in capital values and inflation working together have resulted in implicit price correction. Prices are likely to remain flat in the short- to medium-term.
Is price the reason?
If high property price is the only criteria holding back consumers from purchasing properties, it does not explain large unsold inventory in cheaper markets or projects in lower budget segments across cities.
Budget segments in most cities witnessed only single-digit growth and again, when adjusted for inflation, the growth actually becomes negative. And while prices in many localities and segments (especially the premium segment) had increased beyond the affordable limit of consumers, this by itself is not explanation enough.
Stagnation in transactions and price levels is a reflection of larger issues impacting the Indian economy and only a drop in capital values is unlikely to address the problem of unsold inventory and stagnant markets.
The general expectation is that developers need to cut prices to move the unsold inventory. Using the classic example of demand and supply, it is opined that with demand being low and inventory levels remaining high, prices should come down. And a new equilibrium will be reached where demand will help to clear inventory priced at lower level.
However, there are many issues with this expectation that have not been thought about or addressed. Some of these are:
Impact on consumer sentiment: An important point that is missed in this argument of price correction is that upfront lowering of prices by developers may lead to spread of negative sentiment among consumers. Consumers will expect prices to come down further and even those who have planned to make a purchase might hold back. This will further push down the sales and achieve results contrary to what is being envisaged.
Heterogeneous inventory: The unsold inventory is at various stages of construction and is not homogeneous in nature. As per an October 2015 report by Associated Chambers of Commerce of India (Assocham), 75% of 3,450 live projects tracked across the country remained non-starters as of financial year 2014-15. On an average, projects are facing a delay of 33 months in completion. This heterogeneous nature of inventory affects both developers and consumers.
Consequently, consumers are vary of putting money in projects with lower percentage of completion or with developers that have large under-construction portfolios or less than satisfactory track record of timely project delivery. This apprehension translates into buyers preferring projects that are complete or nearing completion.
What this preference differential means is that even if developers offer discounts for projects in lower to intermediate stages of construction, consumers might not be willing to put money into them.
On the other hand, developers with good track record and projects near completion stage have lesser incentive to offer major discounts. Such developers are likely to garner larger share of demand.
Therefore, even if there is correction in prices for projects in lower to intermediate stages of construction or by developers with large unsold inventory, consumers are unlikely to bite the bullet.
Edited excerpts from Magicbricks.com’s report , Price Trend Report.
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