Homebuyers should wait for prices to fall
A recent report by Knight Frank and Ficci on the sentiment index for the December quarter of 2014 indicates that stakeholder sentiment has dropped for the first time in five quarters
Jan 27, 2015
Source : Livemint

 

Mumbai: Chandan Malaviya, 30, manager with a foreign bank in Gurgaon, has been looking for a house to buy for the past couple of years. The locations of his choice are Dwarka Expressway and Sohna Road in Gurgaon, but exorbitant property prices have thwarted his plan. But he is hopeful now.
“In almost all the projects, there are units available for sale, and for almost a year, there has been no increase in price; rather, property brokers are offering discounts on their last quoted price,” said Malaviya. He thinks that prices will fall further.
There are many people in a similar position who think that property prices in some areas went too high during the realty boom and have significant scope of a price cut. Besides that, the overall subdued realty market is mounting pressure on developers and they may reduce prices.
Prevailing situation
Developers have been struggling with low sales, increasing inventory, high debt and liquidity crunch since the past three years. A friendly 2014 budget and policy reforms announced by the current government have not been able to have much effect on the realty market. Even the recent festival season did not lift sales. The recent rate cut by the Reserve Bank of India, or RBI, (by 25 basis points) is not enough to bring in the much needed boost. At present, most homebuyers are waiting for a significant decrease in prices. If the situation does not improve for developers, homebuyers’ expectation may come true.
A recent report by Knight Frank and Ficci on the sentiment index for the December quarter of 2014 indicates that stakeholder sentiment has dropped for the first time in five quarters. As per the report, investor confidence has taken a hit owing to oversupply in the residential space, and the poor festival season sales figures also dented future sentiment levels of developers. The number of stakeholders expecting a price hike has reduced by over 50% compared with the preceding quarter.
Though the situation differs across markets, “generally, the sentiment is depressed”, said Om Chaudhry, founder and chief executive officer of private equity fund FIRE Capital Fund Pvt. Ltd and chairman and chief executive officer, Astrum Homes. Year 2014 saw a decrease of 48% in the number of project launches in the top seven cities—National Capital Region, Mumbai Metropolitan Region, Bengaluru, Chennai, Hyderabad, Kolkata, and Pune—compared with 2013. Even though there was a significant decline in number of launches, inventory of unsold units increased. “The general slackness in residential sales was primarily triggered by the affordability index going down in certain cities,” said Anshuman Magazine, chairman and managing director, CBRE South Asia Pvt. Ltd.
Even lower rates needed
Developers were eagerly waiting for a rate cut by RBI, which would be passed on by lenders to borrowers in the form of cheaper interest rates. However, small reductions in interest rates will not help much. Gulam Zia, executive director, Knight Frank India, said, “To expect a 25-basis point rate cut to give a new lease of life to developers is highly unlikely. A minimum cut of 200 basis points will be needed to infuse a change in sentiment.” One basis point is one-hundredth of a percentage point.
Financial planners, however, think that it is high property prices that is keeping homebuyers away and not so much the interest rates. “This will not be such a big factor for buyers. Even now, the rates are not so high that it is a deterrent,” said Suresh Sadagopan, a Mumbai-based financial planner. A reduction of 15-25 basis points in home loan rates will not make a big difference. Say, a person decides to buy a house worth `50 lakh and opts for 80% loan, i.e., `40 lakh. If the interest rate for a floating home loan is 10.25% per annum for a loan tenor of 20 years, the equated monthly instalment (EMI) will come to `39,270. If the interest rate reduces by 25 basis points and comes down to 10%, the EMI goes down by just `665 to `38,600.
But if the price of the house itself goes down by 5-8% to `46 lakh, and the person makes the same amount of down payment, the loan will come down to `36 lakh, and the EMI will be `34,740—a saving of `4,500.
Developers are hopeful that the coming budget will have incentives for homebuyers, but considering the significant changes made in the last year’s budget, especially for home loan borrowers, not much can be expected this year. “With discourses of economic revival yet to show empirical evidences of a turnaround and the banking regulator not yet convinced of gifting a substantial rate cut to homebuyers, we don’t see homebuyer sentiment improving. This simply means a continued resolve from homebuyers to stay away from markets. This is expected to add further pressure on the existing moribund finances of developers which rationally calls for a possible price cut,” said Zia.
Agrees Magazine, “Housing sales remained muted even during the festive season, as a cautious buyer sentiment rode over discounts and attractive marketing offers. This is perhaps a signal that prevailing high property prices and high interest rates need to be rationalized.”
A few developers also admit that there is a need to reduce prices, especially in certain locations. Aniel Kuumar Saha, chairman and managing director, Saha Group, said: “Developers in certain locations where prices rose drastically may go for a price cut to clear unsold inventory. However, affordable segment location does not have a scope of a price cut.”
Manish Agarwal, managing director, Satya Group, and secretary, Confederation of Real Estate Developers Associations of India (Credai), NCR, said: “If the slowdown continues even after a year, developers with heavy inventories may be compelled to go for drastic measures, including price cuts.”
Considering that there are compelling reasons on all sides, it may be a matter of who blinks first. If developers are not willing to bring down the rates of ongoing projects, they will have to launch new projects at more reasonable prices. Anuj Puri, chairman and country head, Jones Lang LaSalle India, said, “In 2015, developers will become more earnest about right-sizing and right-pricing. Selective corrections in some of the overpriced cities will help bring about faster sales for stagnated supply of larger configurations.”
Developers also feel that now homebuyers are looking for reasonably priced properties. “Demand and focus in recent times has shifted to affordable housing and that’s where developers are working currently. It will be incorrect to categorize this shift as rate cut. ‘Made to fit’ is actually how we put it; made to fit the demand, budget and requirement,” said Ashok Kumar, chairman and managing director, JD Group Ltd.
Mint Money take
If the current situation of low sales continues for some time, price correction is likely, at least in some areas. Therefore, for those looking to buy a house for investment, it makes sense to wait. However, for those looking for a house for self use, choosing from ready-to-move-in projects is better as it reduces the risk of delay and no big price correction is expected in this segment.
Considering the high inventory in many segments and markets, the pressure on developers is increasing. This may tilt the scale in the buyers’ favour. So, if you plan to buy a house, study the price trends as these vary across micro markets. If you feel that the prices are likely to come down, wait for that to happen. But if the prices in the areas of your choice have been stagnant, you could either decide to buy, or look for other places.

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