Out of reach?
Real estate prices in the country have never been stable for a long term in our market. During the property boom period between 2006 and mid-2008, prices kept soaring. With the number of launches across categories of housing, property investment was considered the safest option. Towards the end of the 2008, property prices had appreciated by more than 100% in some key markets. When the global financial meltdown hit markets, property rates crashed. Development firms resorted to the launch of affordable housing projects. The market started witnessing high levels of activity from homebuyers. Rates were corrected. But the period after 2010 again took the rates to new levels. Speculators were back in the market and the businesses thrived. Post 2012, the phase of recovery again halted. Completion of housing and commercial projects has since been delayed; rising inventory has put developers under pressure to sell. But prices have not come down.
Buyers in India have an emotional connect with property. Most buyers tend to hold on to the property even when it is not being used for living. This tends to restrict the supply of housing in the resale market resulting in a price hike. The Indian market primarily remains an investor driven market. Most newly launched projects have investors as early buyers. As investors are initial sources of funding for most development firms, the rates are gradually increased over the next few months to please them and provide them returns.
Often, second time homebuyers with surplus cash too fall under this category.
As property is seen as a hedge against inflation, most invest to save on to their yearly income tax.
Apart from the reasons cited above, use of unaccounted or ‘black’ money has made the market more speculative. These deals often involve land or a built property, often with a higher price tag. Thus property transactions comprise a white (read genuine price of the property) and a black (read premium) component. It is unfortunate that our market is predominantly using the black component for property transactions. Use of high amount of unaccounted money tends to escalate the price of the property with every transfer.
The country’s regulatory framework also supports price escalation. Currently over 40 approvals are required to start a project. This escalates the overall cost of the project and puts pressure on pricing. The usual period of construction of 24-36 months then stretches to 42-60 months.
What is left for a genuine homebuyer in such a market? A genuine homebuyer, who may be a first time homebuyer, should look at a primary sale. This would mean projects that have just been launched or where construction has just begun. This ensures two things – first buyers will get the property at a lower rate; second, the development firm cannot ask for a black component.
Going for primary sales will benefit the market immensely. An increase in sales will reduce the high levels of unsold inventory and developers will receive funds by way of sales. This would help him complete the project on time. I am not against property investments. But considering the challenges a buyer has to face, for many it makes sense to take property on rent instead of buying. With slow project completion, high retail inflation and borrowing costs, buyers can save plenty by paying rent for a bigger accommodation and quality lifestyle. The rent paid would be lesser than the actual equated monthly instalments against a home loan.
What can the government do in such a scenario? From time to time, the government has been revising the circle rates, the minimum base value of property in a region, to reduce the involvement of black money. While the revision should happen on more realistic levels, it will automatically hike rates. The government should provide tax incentives to increase the supply of affordable and mid-income housing, especially in cities that have more demand. The total housing shortage currently stands to be at 18 million. An increase in the supply will tackle most of the housing shortage. Prices can then also be checked.
• The author is MD of RICS, South Asia. He can be contacted by email at firstname.lastname@example.org