As a real estate industry insider I am usually bombarded with numerous questions & “expert” opinions on property market by my friends in social gatherings. Typical questions I face are – Will prices come down in FY 2017? Does it make sense to wait for few more months / quarters before we decide to buy a property? Will there be less corruption in the industry post demonetization? Will it be a happy or sad new year for real estate industry in 2017? In this post I am trying to answer these basic questions with my limited understanding of the industry. Hope my friends read it as well 🙂
The year 2016 has been a very very eventful year especially for real estate industry. The two most interesting reforms to affect real estate were Real Estate Regulatory Bill 2016 and Demonetization announced on 8th November. Both these events are expected to affect real estate industry in short term as well as long term. I had earlier published a post on how demonetization is going to affect the market. Let’s see how the combination of Real Estate Bill 2016 and Demonetization will affect the real estate market and whether it makes sense to wait for prices to come down.
I don’t see correction in land prices in short to mid term as most of landowners are farmers who have either inherited or bought lands at dirt cheap prices say almost 10 to 20 years ago. These landowners have no / less pressure to liquidate their landholdings and would be happy to wait & watch. Unless there is a major disruptive reform in land ownership, e.g. a major reform to flush out benaami lands, we should not expect major correction in land prices in the near term.
However, I do see, as I wrote in my earlier post, some correction in prices in plotted development in both primary & secondary markets. Plots involve a lot of cash payments as these are favourite tools for parking unaccounted cash by govt officials and investors. I would suggest buyers to stay for a while from plotted development unless discounted price is really attractive compared to the market price.
Apartment Prices (Primary market)
Sorry to disappoint my readers but contrary to the popular belief, prices in primary market are not going to come down further. Prices are already down over 10 to 15% y-o-y in metros in select locations and there is no room for further reduction. Doing so will put most of builders on the verge of financial suicide as they operate on single digit margin.
Additionally, Real Estate Bill 2016 is going to increase cost of doing business for builders who would have no choice but to pass them on to buyers. I expect at least 5% increase in prices post May’17 for the new launches. (More on this in my next post.)
Apartment Prices (Secondary Market)
Secondary market is suffering immensely and will continue to suffer due to demonetization. Resale are down by up to 40% in NCR and Western cities as there is no availability of cash. Even in less cash markets such as Bangalore investors are finding it tough to exit their investments as buyers are negotiating very hard on prices. Real Estate Bill 2016 will not affect property prices in secondary market.
Black money & Corruption in RE Industry
Real Estate is probably the biggest generator & receiver of black money in India. Sellers don’t want to receive everything in cheque as they will have to pay taxes, Buyers too have cash and don’t want to make all their payments in cheque. Builders need to generate cash to pay to landowners, who don’t believe in paying taxes to govt, and bureaucrats, who can’t take bribes in cheque! You see it is a win-win situation for all except for honest tax payers.
Unfortunately the fact is demonetization may not be able to prevent corruption in real estate industry. Fact is no files in city corporations move without hands being greased. These bureaucrats have no motivation to clear any files without their unofficial “fees”. If builders are not able to bribe them buyers should expect inordinate delays in plan sanctions and / or project completion. I have already started seeing builders keeping an unofficial ledger to mark bureaucrats fees as “future liabilities” which have to be cleared as and when cash is generated. Some are even contemplating paying off them outside India.
I don’t see major correction in real estate prices in the short run. Buyers and Sellers will continue to play cat & mouse game for the next few quarters before sanity prevails. Expect buyers to be back in the market after May’17 and an average 5% price appreciation in the new financial year 2017.
However I shall recommend buyers to wait for the next budget which is due in February 2017 before they invest. There might be few important announcements regarding home loans and real estate industry. You never know what is going to come out of PM Modi’s hat!