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Taming the prices

Winds of correction have been sweeping the buyer- parched real estate landscape, drying up the “green profit” fields of developers for over three years now and thus, the realty scene is much like drought-hit Maharashtra areas. But the big difference here is that the situation is not that adverse for a common man.

Taming the prices

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Geetu Vaid

Winds of correction have been sweeping the buyer- parched real estate landscape, drying up the “green profit” fields of developers for over three years now and thus, the realty scene is much like drought-hit Maharashtra areas. But the big difference here is that the situation is not that adverse for a common man.

A large number of prospective buyers have actually been postponing their purchase in anticipation of a further price drop. But with developers not relenting on the price front in spite of huge inventory overhang the buyers too have remained in wait and watch mode. Surveys by top real estate consultants and web portals have time and again revealed a drop in prices even in major metros and there has virtually been no sale and purchase in several tier II and III cities in Punjab, Haryana, Himachal Pradesh and other states. Market watchers claim that if real estate prices, especially in the residential segment, were made more realistic for a larger majority of buyers then the market will surely get the much-needed forward thrust which would be beneficial for the buyers as well as the developers. The RBI Governor Raghuram Rajan, too, asked the developers last week to reduce prices to encourage more people to buy properties. “I am hopeful that as interest rates come down, there will be more credit and buying. And I am also hopeful that prices adjust in a way that encourage people to buy,” Rajan said recently.

While the debate on whether this is the right time to buy and whether the market has actually bottomed out has been on for quite some time, Rajan’s appeal has certainly raised the expectations of prospective homebuyers that homes will get cheaper in the coming months.

RBI has been proactive in easing the interest rates so that a common buyer has access to loans a lower interest rate and the sale volumes increase. It has lowered rates by 1.5 per cent cumulatively since January last year and earlier this month the policy rate was cut by 0.25 per cent to 6.5 per cent — its lowest level in more than five years. More than half of the rate cuts have been passed on by the banks to consumers. But in spite of this the gap between property prices and the purchasing power of a buyer has not been bridged. “The developers have to lower the prices to lure more buyers rather than just offering lip service in the form of freebies and discounts that they are offering at the moment:, says Sahil Goel, who has been scouting for a house in the tricity area for almost a year now.

But developers across the board seem to be not in favour of a price cut. High land prices, long-drawn approval processes, the rising cost of construction materials and labour as well as high rate of interest that the developers have to pay for arranging finance for executing their projects are some of the main reasons cited by them. Parveen Jain, President NAREDCO says, “Home prices have already been slashed to the minimum level possible so much so that any further reduction will lead to loss to the developers instead of any profit. Hence there is no scope left for any further reduction in the home prices by the property developers”.

Agreeing with him Amit Modi, Director, ABA Corp and Vice President CREDAI Western UP says, “There has been consistent correction in property prices for the past three years by nearly 35 to 40 percent across the industry; in fact nearly 90 per cent of the home supply in the country has already shown price correction. Given the ever increasing cost of land and cost of construction any further fall in prices will only lead to NPAs and non-delivery of projects”.

Anuj Goel, Executive Director, KDP, said, “We have already adjusted our rates by 20-30 per cent in the past two quarters and there is a fixed cost that we are working on, if we reduce the rates any further we would be operating in losses. If any further reduction is done on our end the project would only act as an NPA for us”.

Claiming that RBI’s rate cuts are just a drop in the ocean, realtors maintained that several other factors contribute to increasing the cost of a project and all of these should be dealt with if the prices were to be brought down. “Rate cuts are not the only factor that bring down the prices. Service tax, VAT, registry cost and various other government levy only add to the fixed cost and hence lead to an overall increase in the basic price of a project,” added Goel.

Banks, too, have come under fire for not passing the entire benefit of the rate cuts to the end users. “The fact is that real estate industry has seen a nearly eight-year slump and while RBI as well as the developers have done their part, the banks on the other hand have not been generous enough to pass on the entire benefit of this reduction to end consumers and less than half of the cumulative policy repo rate reduction has been transmitted by banks. We sincerely hope that both Finance Ministry as well as the RBI push all the Banks to transfer the entire benefit to the end consumer for whose benefit it is meant, else these moves will severely stop short of benefiting the consumer and only help in buffering the bottom lines of the banks,” says Modi on behalf of Credai.

While the price debate rages in the realty market and serious end users want to know whether the time is ripe to finalise a deal, there is another interesting angle to this debate. Some industry mavens are of the opinion that the very fact that the prices have been stable over the past 36 months and have not been increased is in effect a proof of the fact that there has been a decrease in prices. Real estate on an average sees 10 to 15 per cent appreciation in a year in a robust market, so if you are getting an apartment or a flat at the same cost as three years back then you are automatically getting it for 30 per cent less cost. Thus, this is as opportune a time to buy as it can be even without a clear cut price cut by developers.

Whether the developers blink first and reduce prices or not there is no denying the fact that it is time for the developers to take the market sentiments into consideration and allow flexible pricing for the customers along with increased transparency, so that this sector regains its lost momentum.

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