Realty sector losing sheen?

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Sudeep Banerjee, EMBA 2015-18, Vinod Gupta School of Management, IIT Kharagpur

It has been quite some time that real estate sector in India is constantly faltering. This adds to the prospective buyers delight who could not afford their dream homes earlier because of the high prices. According to data from various consultancy agencies, property prices are going through a lot of ups and downs which is making constructors worried.So, is the real estate market heading for a crash? Let’s try and analyze.

Real estate sector is broadly classified into two segments, one is the residential segment and another is the commercial segment.It is the commercial segment which is facing heat the most.The inventory of unsold flats are piling up.From the year 2010 till the year 2013, there has been a growth of 12% in the prices of the residential flats which slumped to mere 1.7% since the year 2013 and till now.

In the April-June quarter of 2013,house prices fell in 22 out of 26 cities and there are reasons for that the primary reason being the strict monetary regulation due to high inflation.Inflation made homes not affordable for buyers but the developers kept on building housing projects. As a result, supply was too high but demand decreased which ultimately led to the price fall of real estate market. The fiasco deepened when the Reserve bank of India (RBI) advised banks to exercise caution in financing purchases. That means the builder must agree to pay the interest for a certain period or till the possession of the property by the buyer.That also imposed the regulation on banks that the disbursal of loans should be at par with the construction. Banks are advised that disbursal of the loan amount should be based on the completion of the housing project.Also, Modi government’s strict decision to uncover black market has also shortened the extent of investment in the realty market. Earlier, their has been a lot of black money involved in this market and it has been a major reason behind the housing bubble. All of these combined together are creating shortage of money for the developers.

The real estate investors sentiment has been hit hard by recent slowdown in prices.The short term investors are freaking out and have started selling their houses which they have bought as an investment. Though the long term investors are still holding on. Desperate developers are throwing away lucrative offers to the buyers that includes bigger discounts and freebies. RBI has recently suggested the real estate players to bring down their prices to attract buyers so that the real estate market does not crash.

From my point of view,it is highly unlikely that the real estate prices will come down by 30-40% because that can happen only when the economy is in recession. But since the Modi government took control,Indian economy is doing quite well, GDP is growing at a good pace, inflation is down and foreign investments can be seen in almost all sectors.Apartments that are not affordable right now might witness demand when the income of the buyers increases in the next 2-3 years.
So, it’s better to wait and watch while the storm settles down.

References :

Economic Times (24th August 2015), Business Today


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