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Indian property market - A realty check in 2012

| 12/16/2011 12:36 PM Friday

I would start by talking about a certain change that has taken place in the Indian real estate market. Initially, the real estate market, like any other market, was driven by the demand-supply equation. However, as times changed, sentiment also started driving the market, much like it drove the equity market.

Now, if you look at the demand-supply ratio, different factors operate differently all over the country, since the demand for real estate is elastic in nature. There are cities where approvals have slowed down (for example, Mumbai and Chennai, where it takes six to eight months to clear the files), mainly due to a change in political leadership. As project approvals slowed down, the supply shrank. So, even if the demand has gone down, the prices have not gone down. It is hard to imagine that in a place like Chennai, the prices of residential property have doubled in comparison to those in other booming cities like Bangalore.

Now, let’s talk about the interest rates. These have increased manifold in the last year or so, resulting in pushing up EMIs by almost 25 per cent. Remember, if the EMI exceeds 50 per cent of the take home, it begins to hurt. Certainly, the income levels have not gone up as fast as the interest rates have. The EMI comes from the ‘after tax’ amount of income. Thus, if the EMI goes up, your gross earnings have to go up by one and half times to keep pace.

How do financers handle these changes? Well, if you are a young person, they just extend the repayment period and keep the EMI constant. However, if you are a 45 year old person, the option of extending loan tenure does not exist for you.

Another thing that is hurting the industry is the behaviour of the prices of construction materials, including steel, cement and bricks, which are getting increasingly volatile. If the prices are high, particularly in the affordable housing segments, it again begins to hurt. If you are selling for Rs 10000 per sq. ft., then your cost is only 20 per cent of the total amount, and you can absorb the frequent rate changes. However, if you are selling for Rs 2000 per sq. ft., you have a problem.

The net result is that we have all gone wrong. All the industry experts thought that the affordable housing segment would not be affected by a recession. However, it turns out that this segment is in fact, the most affected. There is also considerable noise about how growth in states like Bihar is affecting the construction industry, which is facing a major labour crunch. I maintain that this is not the issue right now, since the level of construction activity has gone down in recent times, mainly due to a lack of liquidity and a slowdown in demand, particularly for office space. I am not saying that labour is available in plenty, but it is not a problem for sure. Fortunately for India, there is high level of mobility. People are ready to travel to wherever it is that they get work.

 

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