Should Home Buyers Wait Till Prices Fall?
Potential home buyers have been sitting on the fence for over two years. Many experts believe that real estate developers would buckle under pressure when their worst fear comes true. They expect developers to slash prices when unsold inventory rises beyond a point. But, will this ever happen?
The answer is “No”. Some developers may slash prices under certain circumstances, but they are not likely to cut prices across the board. In other words, this is not a bubble about to burst. Real estate developers have good reasons to hold on to their stock without cutting prices.
The demand for ready-to-move-in apartments is still high
It is true that there is an unsold stock of around seven lakh homes across India. But, this does not mean that developers are unable to sell fully functional homes. Much of the unsold stock are under-construction apartments. Often, these apartments would not be up for possession for the next three to seven years. Builders would be able to sell them off in this time period.
In Mumbai, unsold inventory is estimated to be around 80,000. But, according to a report of Kotak Institutional Equities, merely 8.5 percent of the unsold inventory of apartments in Mumbai is ready-to-move-in. Much of the unsold inventory is in Thane and Navi Mumbai. The report says that in Greater Mumbai area, less than two percent inventory is in ready-to-move-in projects of large developers. The report bases its observations on a panel discussion of real estate developers.
According to PropTiger.com's report for the first quarter of the financial year 2015-16, however, the ready-to-move-in apartments in Navi Mumbai and Mumbai is four per cent of the unsold stock. In Thane, ready-to-move-in unsold inventory is three per cent of the unsold stock.
Many builders are willing to sell their under-construction apartments at 60% of their price to ensure financial stability. But, as many ready-to-move-in homes are not staying idle in the hands of developers, they still do not feel compelled to lower prices.
Shortage of homes
Buyers are waiting for prices to fall, but there is still a shortage of apartment units, said Anand Gupta, proprietor of RNA builders. Shortage of homes is the most reliable indicator of the fact that there is great demand for homes. “The hope that prices would fall is naive. I think property prices will remain stable for a while. Prices have been stagnant for a while, and will continue to be so in the near future, before they rise again. This is how the real estate market works. Demand has been low because the economy is slow. But, demand will rise again,” he said.
Many developers think that their costs have not declined. So, they cannot pass on the benefits to home buyers. Though the popular perception is that builders are holding on to unsold inventory without slashing prices, they purchased land at a hefty price. The cost of construction and FSI premium have risen too. When the costs of developers are rising, it is unlikely that they would lower prices.
“There is also a shortage of land in areas where the infrastructure is ready and people are quite willing to live in. If this is so, why should we cut prices?” asks Gupta.
Builders choose to wait because they think that this is a period in the business cycle when output and prices decline. “India's GDP and foreign direct investment levels have been rising. This will lead to greater employment generation. I expect demand to rise in the next six months,” said Sunil Mantri, the chairman of Mantri Realty.
Interest rates are not likely to fall
Home buyers expect the Reserve Bank of India (RBI) to cut the repo rate further. But, the prospects of a further repo rate cut is bleak because the RBI has cut the repo rate thrice in 2015, by 75 basis points so far. Banks have not really passed on the benefits to all types of borrowers. The interest rates for retail customers have declined by merely 30 basis points. This is modest, when compared to the RBI's rate cut.
In the future also there might not a drastic reduction in rates as banks fight of their own troubles of non-performing assets (NPAs) amongst others. “Interest rates are not likely to fall further, because they are already subsidized. The RBI kept the rates unchanged in the latest monetary policy review, to signal that the central bank has no intention to cut the repo rate further,” said Gupta referring to the RBI's bi-monthly credit policy announcement on August first week.
Who is cutting prices?
According to a report of PropTiger Data Labs on the performance of the real estate sector in the first quarter of the current financial year, sales would, at best, modestly improve. To urge potential buyers to buy, developers are offering freebies, and easy payment schemes.
“Customers are holding back their purchases hoping that prices would fall. Unsold inventory has marginally decreased hence prices are expected to stay stable. Though developers are not reducing prices of old inventory, most are launching subvention schemes, possession linked plans to lower the cost to customers,” said the PropTiger Data Labs report.
Developers like Lodha and Dosti have cut prices in their new launches and buyers have responded well to this. In the festival season of Dusshera and Diwali, more such schemes are likely to emerge.
“Developers might cut prices. It is even possible that prices would decline over five per cent. But, such discounts would be time bound, and would be valid only if buyers book flats within a specified time period,” said Gupta. If you are a home buyer who has been eagerly awaiting attractive schemes, this is the best time to buy.
(Katya Naidu has been working as a business journalist for the last nine years. She has covered many beats including banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities)