Pull and push of home prices
Costpush, demandpull factors indicate return of price stability in the primary housing market
CHANDIGARH: Home prices in the secondary market (resale) consistently declined in the last six years. In the primary market, prices declined, but at much lower rates. Several factors indicate that prices in the primary are set to stabilise.
ADDING TO THE COSTS
The Rera compliance: The Real Estate (Regulation and Development) Act is expected to bring in greater transparency and accountability in the housing sector. There are also concerns that it might add to the overall cost of housing for the buyer.
“The compliance with the norms and conditions of the act will increase the cost for the developer, which ultimately will be passed on to the buyer. Also conditions regarding the escrow account for a project and restrictions on spending of the collected money from the home buyer for a project are also expected to increase the costs for the developer. This increase in cost will restrict developer’s ability to cut prices,” says Prateek Mittal, chairman of real estate and infrastructure, regional council (north India), ASSOCHAM (Associated Chambers of Commerce of India).
Raw material costs: In recent past, cost of several construction materials increased while for some it declined. The new indirect tax regime, GST (goods and services tax) has also added to cost fluctuations for some raw materials. These are, however, still early days to fully assess the impact of the GST on the real estate sector. But, local real estate experts say in short term, some raw materials have registered price appreciation.
“There are still several issues to be sorted out at the level of the tax payer. Some of the suppliers of inputs to the construction industry have increased price of commodities and are adding GST to it. This is especially the case with items that are sold in open and not marked with MRP (maximum retail price). The increased labour costs have also added to the construction cost. factors might restrict the potential of price cuts, particularly, in the short term,” says RP Malhotra, a Chandigarh-based real estate expert.
CHANGING MARKET FUNDAMENTALS
Demand-supply adjustments: It is now nearly six years since the slowdown in the housing sector started. And then came several policy decisions that impacted both demand and supply in the sector. The demand-supply mismatch was one of the reasons contributing to sluggish market conditions and price corrections. This is now starting to stabilise.
“The triple tsunami of demonetisation, RERA and GST resulted in a deceleration of new property launches. The supply of new housing units in the top six cities in India during the first three quarters of 2017 was down by around 60% compared to the same period in 2016. However, this curtailed pipeline of new launches serves to cover the prevailing demand-supply mismatch, impart equilibrium to the market and make it unprecedentedly end-user friendly,” says Anuj Puri, chairman of ANAROCK property consultants.
Increase balance between the demand and supply will further stabilise prices in the sector and reduce prospects of home price corrections in the primary market. Developers are also adjusting to the slowdown and government policy. More and more developers are now focusing on the large potential untapped demand in the affordable housing segment. The recent government initiatives in the segment are also encouraging supply creation in this segment while the mid-price segment registers supply stagnation.
Demand revival: As the gap between demand and supply narrows with tepid supply growth, there are expectations that several factors might increase the housing demand at the same time.
“The impact of the salary increases as per the 7th pay commission will start to fell in the medium term. One can expect the housing sector to benefit from it. There are also indications that after several policy induced disturbances in the economy, it is now getting stabilised and growth rates are picking up in different sectors. All this will impact positively the housing sector and fuel demand growth,” says Malhotra.
The relatively low home loan interest rates coupled with increased money in pockets of the salaried government class is also expected to give a boost to housing demand in the mediumterm, say realty experts. Improved buyer confidence: The builder failure to deliver on his promises was one of the major contributory factors for the demand decline. Rera, GST and controlling the flow of black money to the housing sector are expected to boost buyer confidence in the sector and builder accountability.
“There is a growing need for tax rationalisation and some stabilisation. We are aware that the implementation of the GST and RERA, have added to the challenges of the real estate sector, but going forward, the net impact of these policies, will be positive and the sector should be able to witness a enhanced sense of transparency and accountability,” says Niranjan Hiranan These dani, president, NAREDCO (National Real Estate Development Council).
Shifting moods: The market sentiment holds the key to price movements. So far, the investor has stayed away from the sector not sure whether he can gain from the current market conditions.
“While sentiments are largely transient in nature, the prevalent mood in the industry reflects that it has finally come to terms with the short-term adverse impacts of the structural reforms that became a reality over the past 12-odd months,” says, Shishir Baijal, chairman and managing director, Knight Frank India. The subdued market sentiment can start to change when “the end-user demand becomes stable in most segments of the sector. As this happens we will see the return of the investor. This isn’t expected in the short term. But, we can expect demand increase and price stabilization in the coming months,” says Malhotra.
For the end-user, say realty experts, it is time to explore the housing market. In the short term, the builder discounts and freebies are expected to continue as they reel under continued pressure.