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CONTRARIAN Real estate prices will fall before they rise again. By Ashish Velkar
But the manner in which these prices, the differential and the equilibrium, vary are determined by the complex interaction of demand and supply--two terms that are most debated, and misunderstood, in economics and the real estate business. Sure, their steep escalation in every segment since 1991 contrasts sharply with the steady growth of prices before that--evidence of half-baked reforms at work. But the subsequent slump across segments and metros--40 to 50 per cent, in some cases--signals an evolution to a more mature real estate market. Although such a movement is distinctly discernible, we have a long way to go before it transforms itself into a free market, which has implications for price movements in future. Which leads us to the questions that everyone is asking me: are prices in the real estate market going to continue to stay depressed? Or have they bottomed out and will now begin to move north? Or will they move south before they rise again? Since we do not have unrestricted market forces, especially supply, it is difficult to predict what is going to happen in the real estate market. Based on an analysis of six trends, you could form your own opinion: Legislative Amendments: While restrictive legislation--the Rent Control Act and the Urban Land Ceiling Act--is bound to be amended, the question is: when? If changes are made in the medium term, it will unfreeze supply, and create more downward pressure on prices. Supply Additions: Millions of square feet of new construction are scheduled to be completed between 1998 and 2000 in the four metros without any evidence of a proportional increase in demand. This will, surely, lead to over-supply, adding to the deflationary pressures. The Economy: An unstable rupee, high interest rates, sluggish demand, and the Asian Crisis will keep demand depressed. Prices, affected as end-use demand falls, will not recover until business confidence increases. Further, as we liberalise, the market will tend to stay cyclical, with alternative periods of booms and slumps. Investment Type: Most real estate acquisitions in this country, even individual, are funded by a large proportion of savings, or funds borrowed from friends and family. But the lack of debt-funding will, at worst, lead to stagnation rather than a meltdown. Development Issues: Customers have become more discerning, demanding value for money in real estate terms. They want quality in the apartments they purchase, and amenities that enhance their quality of life. Developments that do not provide quality design and construction will, therefore, not be able to command price increases irrespective of their locational advantages. My own prognosis is that real estate prices, across the board, are going to have to correct themselves even more in order to reflect the increase in supply, the depressed demand, the lack of business confidence, and the inflated levels in the first half of this decade. Real estate is not a homogeneous asset--something that we are only now beginning to appreciate. So, it is difficult to average the extent of the decline across sectors or even cities. But it would, I think, be safe to assume that real estate prices will correct themselves by another 15 to 20 per cent on an average this year. Your strategies would, of course, vary depending on the asset type (residential or commercial) or the location (city or suburb). But my advice would be to minimise your losses on white elephants that you can ill afford because the chances are that price-levels will worsen before they get better. If you are, on the contrary, waiting for some juicy picks, be patient: the best may not be on the market yet! |
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As the only one of the factors of
production that can neither be created nor destroyed, the price of land, as the
Access-Space Trade-Off Model tells us, is higher in the urban centres than on their
fringes. Because people and companies prefer to locate themselves at centres of economic
and social activities in order to offset their costs of transportation. 