In the last couple of years the prices of properties in Indian cities have skyrocketed to the new highs. The rise in the price is because of the various factors influencing the property market like loan interest rates, construction cost of the civil work, land prices, increase in the registration and tax rates, etc. Another important factor is that people who are investing in the properties are those want to hoarding their lump sum money (black money) finds the property market is the most suitable.
This keeps the demand for the real estate properties always in the higher level. People who are depends on their salary income finds difficult to buy a property in the very high price, but still they are hoping that property prices will come down. There are very less chance that the prices would come down, at least not in the near future. This article explores the various factors influencing the price rise and why it is very difficult to adjust in the short term. If you have any plans to buy a property or working on the real estate firm, please post your thoughts in the comments section.
Also read:
Construction Cost and Labor Work
Construction Cost is the most expensive in these days. This factor increases the actual cost for building the apartment or house. Also puts more pressure on builders to manage the marginal profit on each sales. (eg.), If the total expenses for constructing an apartment (flat) is say Rs. 15 lacs. It is only the cost for apartment floor. Then expenses incurred for acquiring the land, labors (supervisors, engineer), marketing the project(advertisements, sales agents) would add on top of the cost say Rs. 500000 for each unit. The final price of the construction cost for the flat would be Rs. 20 lacs. Then it is up to the builder to set his own profit margin for the each unit sold. In the above example, if he wants the profit of Rs. 10 lacs for each unit, then the sale price of that flat would be Rs. 10 lacs.
The above case if a simple example for flat with the basic facilities. If the project has the various amenities like Gym, Swimming Pool, Play Area, Shopping Complex, Solar Power Supply, Non-Stop power supply backed by Generator, etc. will increase the flat cost. Also location of the project is important factor on influencing the price. The land prices in the very prominent area of the city would be multiple crores which would be added into the flat cost.
- Looking into the current inflation, there is very little hope for the notable price reduction in the raw materials like Cement, Steel, etc. Also there will be a wage hike in the labor industry due to the shortage of the low level labors.
- Unless, the prices of these materials reduced, the builder will not afford to reduce the price.
- Price correction of 10-20% is very normal and it doesn’t make the difference in the industry. People who can buy a flat for Rs. 50 lacs, will always try to afford if it costs for Rs. 60 lacs.
Continuous Buying from Wealthiest Customers
Another factor is the perception of housing market in India. Most of the wealthiest people in India consider buying a house is the good investment option for the long run. In fact, it is proven that housing market has given the very decent profit (some time beaten the equity investments) for every one who are invested for past decades. This attitude keeps the demand for the properties afloat always. If some one bought a house for his own occupancy, then he buys another property for the let out. Even though the return on investment of buying the property is less compared to keeping that money in the fixed deposit, every one expects the capital appreciation in the long run. It adds more competition to the first time buyers.
- Politicians and business man use the real estate for parking their black money.
- Non Resident Indian (NRI) invests in the Indian real estate from abroad.
Taxes and Registration Charges
Another sad news is that, Govt. want to utilize the booming in the housing market and gain some tax income. They keep increasing the tax or introduce the new kind of transaction charges for registering the property. Unfortunately it is directly affecting the middle class family and have less impact to the wealthiest people.
- Budget 2012-13 has announced 1% TDS on property transaction.
Housing Market Needs Regulation
Fannie mae is the housing market regulation body in USA
Unless the Govt. decides to regulate the housing market, there won’t be any significant changes on the real estate industry. What do you meant by regulation?. Yes, in the current scenario there is no safety measures for the home buyers. We have learnt lot from the Greater Noida Land Acquisition Case. This issue has prompted the importance of housing market regulation in India. But, there is no measures taken by the Govt. to prepare a bill and help the future buyers from the builders who are cheating the customers. The regulation should have the following factors to make the real estate in India to benefit common man.
- Builders has to publish the expenses incurred for an flat construction.
- If the builders is not received all the approvals from the Govt. he should not start the construction. (see DLF in Bangalore).
- Banks must disburse the loan amount only when the builders completing the cor. Banks has the greater responsibility on this, there are few banks not taking it serious and disbursing the entire loan amount without seeing the progress of the project. Builders are taking advantage of this and put burden on the customers.
- Listed companies must maintain the debt level in control. (see DLF’s tough time to survive)
Summary
This article more focused on the negative side of the real estate market which would dismantle the confidence of customers. The message is clear, housing market in India is complicated and one needs through investigation before making the any investments. If you find the good builder and suitable project, your life will be happy without any hassles. If you are looking to buy a property, this could be the time and make it right away with due diligence. As I have pointed out in my earlier articles, the interest rates started coming down. Have fun with your new house!!!
If you have any doubts or suggestions on the property market, we are here to help you. Please post it in the comments section.
April 4, 2012 at 11:05 am
It is deceiving to state that property investments beat equities. Yes, maybe for a year or two, if you want to PROVE such a statement, you can. But over time, i.e. decades, property investments perform worse than equities.
Some nationalities also need to break free from a generational belief that property is the default investment format. A lot of information if available to make wise and safe investments without the constant headaches of a property investments.
I have many Indian friends who bought apartments in India a few years ago, and it is not yet completed. They are therefore making payments, without a tennant in the apartment, making the expected investment in fact a big liability, and not an asset.
Some creative thinking is required to open our minds to what is out there in the world. For expatriates living abroad, buying a house at home sounds rational, though the same money on world stock markets – if chosen correctly – can surpass most property investments by far.
April 7, 2012 at 8:42 am
HI PJ,
Thank you for the comments. I would agree with you that the investment perspective for the property may not be good in the long term. This article focused on only the analysis on chance for the price reduction.
Thanks,
Krishna
June 18, 2012 at 5:47 am
Well, I am not sure if the property prices will fall by too much in Indian metros / other cities where they are sky rocketing. But in reality if you look at the prices after 10 to 20 years the price will be more are less the same. Becuase its gone too high and is not affordable by most middle class Indians. And if it needs to increase by 50% then the current salary levels need to increase by 50% atleast. What happens to inflation then? Every thing is linked directly or indirectly. So the best option will be to split your wealt into multiple pots such as FD, Property may be one if you have got that money (I will not take a loan to buy now rather wait for 10 to 20 yrs), Equities carefully studied and invested. Farm land if sensibily priced.
June 18, 2012 at 6:10 am
Hello bganesan,
Thank you for reading my blog.
I am certainly agree to your thoughts. Thinking of the next 10-20 years, there would be lot of changes to the property prices. The property prices are impacted by many factors like country’s economy, political situation, etc. Also the current trend is most people in need of the houses, so there is huge demand for the houses. It ma be totally different after 10 years.
In any industry, after certain level, the growth will be stagnate. Soon that will happen for the real estate.
Thanks,
Krishna