I play
badminton frequently. Outside of the court, we engage in casual chat on variety
of topics, from recent experiences. One of the players, was cursing real estate
market. He has invested in a house, in a luxurious gated community, 3 years
ago. He was not getting the right resale price. He is being quoted price lower
than purchase cost. That’s a major concern. I had purchased 2 flats, in 2004
and 2009. The resale prices have shot up crazy. Likewise, I would have expected
10-15% appreciation YoY. So, are the stories of economic slowdown, national
crisis true? Is Modi, failing, as lot of economist talk about?
I spoke
to a friend of mine, at a senior position in a large finance corporation having
multi crore exposure in real estate market (financing not only consumer home
loans, but also large builders/projects). What better source to find out. I
discussed example of this badminton friend's potential loss. He asked for
details of location, scheme, builder etc. Then gave a clear picture of the
situation. The area (Ahmedabad, in general), has huge over supply. About a
third houses are actually occupied, although, almost 100% property has been
sold out. Most purchases, as investment instruments. (One of my classmates
purchased 3 flats in the township, for 4 member family). Newer township are
being constructed in the vicinity at a rapid rate.
There's a
whole lot of people (migrating for jobs) who are looking at flats, on rent, because
they do not want to invest in property. Some other, who are actually looking to
buy, either to stay, or as an investment (still- I fail to understand why?).
Let's skip rent segment. Focus on the buyers. The builders have only marginally
increased the prices. So, when my friend was trying to sell the flat, expecting
10% YoY appreciation, the buyer sees a brand new flat for a slightly higher
price. They would be interested to buy the old flat, only if they are getting a
bargain. The seller doesn't agree to this, obviously.
Just
because a lot of people are not able to sell (cash out) invested property at
profits does not mean a slowdown. Newer flats are being build and being
purchased. People are renting out flats. That's not slow down. The very fact,
you can buy new flats for a marginally higher price, is good; inflation is
under control, builders are not artificially inflating prices, lobbying. Prices
are determined by market forces- supply/demand, not manipulated.
Out of
curiosity, I asked him about real estate industry; if there is a gap in demand,
why are people buying? How long will builders keep constructing. The answer was
obvious. Till people keep buying. The current market scenario promotes buying
for staying. Not so much conducive for investment (hoarding); many businessmen,
NRI's etc used to do; to stash surplus/unaccounted cash, used as an instrument
to convert black money. Now that's becoming difficult. Due to the drop in
resale value, and regulation changes.
He also
added, they are largely funding affordable housing schemes (under Pradhan
Mantri Aavas Yojna). Numerous builders are now constructing houses in the
affordable segment where the demand and consumption there is high. But the
prices are controlled by government regulations, slabs and ceiling, builders
have to adhere to, to avail benefits/incentives. For end users (poor man), the
regulation change eases buying process/owning house. Now, the entire subsidy is
calculated using Net Present Value method, released at the time of purchase;
easing burden of heavy initial investment, which people in lower segment
struggled with. This also brings down the monthly instalment. The revised EMI,
now is quite close to what these folks pay in rented/shared accommodation. By
paying slightly more, without the burden of high initial investment, the poor
are now able to afford own house. And there are thousands of such houses being
constructed and purchased, by the needy, who need a roof over their head.
Houses being owned by people who otherwise would have never dreamt of it. I see
that as progress. Growth. "Sabka Vikas".
Jain Hind
Note: the market situation described here is of Ahmedabad. The scenarios may be different across different cities.
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