Real Estate - Uncertainty on buying decision

Recently at the SBI Conclave RBI Governor Raghuram Rajan hit the bull's eye of Real Estate problems. He categorically said it is not the interest rate but the sky rocketing home prices which is hurting the industry and keeping the actual buyers at bay.

I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don't want to create a situation where prices stay high at the level which means demand can't pick up" Said Rajan

He added - It would be "great help" if realty developers sitting on unsold stock bring down prices. Once the prices stabilise , more people would be keen to buy houses. 

Nothing can be narrated in precise way than RBI governor did. The realty segment today is under depression and has dearth of buyers. If we go by statistics, situation seems so grim that entire hype created in last one decade might prove to be a bubble. However, it is interesting to note that developers are not ready to buzz down and are defiant to keep the artificial prices in the segment despite advice of Mr Rajan. Their argument is high input cost and high land prices doesn't allow them to bring prices down. 

URBAN HOUSING
Urban Housing in last 20-25 years has seen changes inspired from global trend. There is social, financial as well as economical aspects which has changed the living pattern. Migration to bigger city, emergence of nucleus families and easy availability of financial assistance from lenders are some of the reason which has paced the growth of urban housing in last few years. Demand from the Tier I and Tier II cities resulted into urban cities cluster into many parts of country. For   example, Delhi today is surrounded by urban cluster of Gurgaon, Faridabad, Noida, Greater Noida and Ghaziabad which has given millions of people choice of affordable as well as luxurious living options. Geographical spread of Delhi certainly could not have withstood if the growth was largely concentrated into it. Same is the story everywhere near metropolitan cities as they expand horizontally as well as vertically. If one drives through the outskirt of cities one can find huge cluster of housing developments underway. It makes one think if so much of new construction will find actual buyers ???

DEMAND & SUPPLY

Demand and Supply are the basics of any trade to decide the prices. However in housing segment the figures are quite interesting as well as worrisome to see.

According to "White Paper - Indian Housing Industry" by Research & Consultancy firm RNCOS, urban Housing shortages in India may reach to 34.1 Million by 2022. Urban housing shortage stood at 18.8 Millions in 2012 and is growing every year. It plainly means there is less number of houses being constructed than actually required.

But in contrast it is reported that all metro cities have inventory piled up as ready to move homes are unsold. As per report of  Knight Frank India , there are approximately 7 lakhs unsold homes in 8 major cities. Mumbai Metropolitan area with 1.95 lakhs unit and Delhi NCR with 1.9 lakhs units leads the pack. However the statistics on this account is difficult to get as developers and builders won't reveal the actual figures. Further it is estimated it will take around 3-5 years time for inventories to be sold up at current pace. The situation as stated above lands us in a situation where on the one hand there is urban housing deficiency on the other hand there is unsold inventory waiting to be taken care of.

So what is causing this imbalance in demand of basic need of Housing ? In all probability Price. When a decision making tilts towards the pricing , it definitely favours the buyers better than ever.

IS IT BUYER'S MARKET  

When there is slowdown in sales and correction in prices it is assumed to be buyer's market as they start calling shots than ever. The situation is like more houses chasing less number of buyers. Be it Primary or Secondary market, the seller loses the hold on firm prices. Year 2006-2010 is stated to be Seller's market when there was no equilibrium and prices moved north very rapidly. In comparison, 2010-2014 was more a balanced market where sellers and buyers almost had similar negotiable clout. Still buyers had upper edge in primary market and seller in secondary market.

If we evaluate situation today, Buyer's have got the upper edge in negotiations. While the luxury segment has seen price correction of upto 25-30% , the similar correction is yet to be observed in mid and affordable segments. Mid and Affordable segments has still not seen any substantial price correction in last several months. While luxury segment is being driven mostly in secondary market, Mid and Affordable segment is still being largely controlled by developers. And developers are not ready to lower the prices, even if the they have unsold inventory resulting in market to hang in balance. If market is not going down, it is not going up either.

Expect market to be corrected by at least 12-15% in this segment in coming 1-1.5 years. The correction of 15% if factored with 8% bank interest of holding fund with self gives buyer advantages of around 23% in a year and around 30% in 2 years horizon. It is also to be noted that, a rented home always costs you lesser than EMI on same home if purchased. Another observation here is market seems unlikely to go up in less than 2 years time horizon, which emphatically means equilibrium will continue to remain in prices. Buyers holding fund for better negotiation also beat the uncertainty of under construction houses which is the biggest evil in this industry. Many experts might say this is best time to buy property (like they always say) but in my opinion wait & watch can bring more fruits for a decisive buyer. Some special housing pockets might duck the trend though and outperform the overall industry.