Dr. Sanjiv Agarwal
The residential property market in India, particularly in the Tier I & II cities, has remained sluggish for the past 12 months, with significantly lower sale volumes, especially when compared to the high absorption rates of 2010. Home loan interest rates now seem to be declining from their cyclical highs but unforeseen tax levies have come at a time when the industry is facing its moment of reckoning.
In the recent budget, service tax @ 12 percent has been levied on almost all services including residential properties. Now even the restriction of 12 dwelling units for a residential complex has been abolished and as such construction of two units shall be liable to service tax.
The cost of construction is going up and up and in times to come, cost of construction as well as land can not be expected to come down. The cost also goes up due to increased cost of funds, labour cost and other factors such as conforming to the building norms. Of late, at least reputed builders are now constructing strictly as per the authorized plans and have also transparent system of pricing and payment. That builds the trust level between the buyers and builders as well as bankers who finance such projects, either as a project corporate finance or as house loans.
Determining residential property prices usually entails a trial and error approach. During the good times, prices are invented. When the going gets tough, prices are discovered Developers continually assess the market with trial prices levels to increase sales in on going projects. To avoid adversely signaling the market (which could lead to a downward spiral), prices in on-going projects are kept upward.
In the first phase, negotiation are held to test the market’s appetite. If sales do not recover, discounts are offered up front on the table. If there is still no perceived recovery, discounts are advertised to increase visitors to the sales office. At this stage, the market is said to have witnessed a correction. This is fundamentally a process of muddling through in which residential prices offered by developers in on going projects rise like rockets but fall like feathers.
However, during a slowdown, developers try to register sales by launching new projects which are different from on going projects- and priced much lower than the market average (the price levels being decided by the root method of decision marking). Since new projects have a high construction risk, the lower price is somewhat justified and avoids the signaling effect to the market.
Despite slow sales, highly leveraged balance sheets, expensive finance in a high interest rate environment and rising inputs costs, developers have been able to avoid a market wide crash. They have been able to generate sufficient cash flow through the gradual process of price discovery and several factors are in their favour in the near term.
In Jaipur, over 60% of the launches in major projects are priced in the range of Rs 1500 to Rs 2500 per sq ft which meets the demands of middle income buyers.
The RBI has given sufficient indication or probable cuts in key rates during second half of 2012, which will improve affordability for home buyers and provide lower interest costs for developers. This leaves home buyers with a small window of opportunity the next six months, when home prices should witness marginal appreciation. After six months, a second wave of high appreciation may follow.
Author Bio
