Finally, home prices begin to soften

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Weak sentiments owing to the slowdown in the economy seems to have finally taken a toll on the demand in the residential real estate sector as house prices for the quarter ended June 2013 softened across the country. According to the data released by National Housing Bank (NHB), 22 out of 26 cities that are covered by the NHB Residex witnessed a fall in housing prices during the quarter ended June 2013, when compared with the previous quarter.

The Residex, prepared by the NHB, tracks movement in prices of residential properties on a quarterly basis. According to the index, during the period between April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall in prices.

Ludhiana witnessed the biggest correction of 6 per cent while Indore and Vijaywada were next with prices falling by 5.6 and 5.4 per cent respectively. Prices in Delhi and Mumbai fell by 1.5 and 0.5 per cent respectively. Only four cities — Nagpur, Lucknow, Surat and Dehradun — saw a rise, with Nagpur witnessing the maximum rise of 3.1 per cent.

The uniformity in the fall in residential prices is a recent phenomenon and when seen on a year-on-year basis, prices in only 9 out of 20 cities declined, with Indore and Ludhiana witnessing the biggest fall in a year by 9.4 and 8.2 per cent respectively. While Jaipur witnessed the biggest surge over the last one year at 41 per cent, Delhi and Mumbai saw prices rise by 15.7 and 12.2 per cent respectively in June 2013 over that in June 2012.

But price fall may not be a real indicator of the ongoing slowdown say experts. “Prices are not down too much and in some cases they have not even fallen but sales are definitely going down,” said Anshuman Magazine, chairman & MD of CB Richard Ellis India.

The situation is, therefore, different for different cities. “Mumbai is in a much worse situation than Delhi and it has been witnessing a decline in transactions over the last two years,” said Gulam Zia, national director, research and advisory services, Knight Frank India. The prices in Mumbai however rose by 12.2 per cent over the last one year.

Reasons for the softening

While the commercial real estate prices started to ease over the last couple of years amidst weakening economic fundamentals, the markets saw the coming softening in residential real estate prices. Industry insiders accept that there is decline, and blame it on several factors including a slowdown in the economy and the battered sentiments.

“Real estate rides on economic growth and with a slowdown, the demand has gone down. Also in some cities the prices went up very high and therefore had to come down,” said Anuj Puri, chairman and country head, Jones Lang LaSalle India. He added that while commercial prices started to come off in line with slowdown in the economy, the residential prices continued to remain high. “They have now caught up with the economic trend.”

There are others who agree with this observation, but add that oversupply and overpricing had reached a point that made it inevitable for the prices to soften. “There is clearly an oversupply situation and also the prices had reached a stage where they had to come down,” said Zia.

Experts also point out that in several cities there were micro areas where there is a supply bubble and it is far removed from where the actual demand lies. In addition, high interest rates have softened demand for housing.

Will the fall continue?

The market seems unanimous that prices are not going to harden in the near term. “With the current economic scenario, unstable political environment and elections round the corner, the uncertainty is very high, and in this environment, real estate prices won’t see a rise,” said Zia.

While Magazine feels that the prices may soften further if the situation does not improve, Puri is of the view that prices are not going to harden in the near future.

However the correction may not remain even across cities. For example, while both Delhi and Mumbai are witnessing a fall, experts say that developers in Mumbai tend to delay delivery and also wait for markets to improve thereby holding on to higher prices. A limit on supply further helps them. This may not be the case in other cities that are facing an oversupply situation.

Developers in Mumbai argue that there is a limit to the reduction in price that a developer can offer. “Prices can’t come down beyond a point as the cost of land is high, the taxes have gone up significantly and the overall cost for developers have risen,” said Niranjan Hiranandani, co-founder and MD, Hiranandani Group.

He, however, accepted that in the short-term, the market is going to remain slow but the prices will take off in the medium to long run because of high real demand.

Should investors look at this market?

While the price fall has only made things better for the first time buyer, it is a tricky market for the investors. There may be good deals available, but investors need to be careful about the quality, price and location. “Investors need to have a holding period of around two years,” said Magazine, adding that investors will have to bring down expectation as returns available in the past may not be there going forward.


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