Inventory hangover and falling sales may lead to real estate bubble burst

Q: The realty markets is facing a horrific slowdown, with sales down desperately and the inventory of unsold flats piling up. Even investors in property are facing the heat.

Sandeep Mhatre, Mumbai

24th August 2015

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Replies (3)

True Nikhil,
Last week, RBI Governor Raghuram Rajan told that the industry must bring prices down to attract buyers. If real estate developers will able to bring down prices, it will be a big help to the sector. Once there is a feeling that the prices have stabilised more people will be ready to buy.

But the builders have already sold a significant inventory of those projects. If they cut prices now, they will lose their reputation.

Rameswari, Bangalore

24th August 2015

Comment

Hello Rameswari,
One major reason for the slow down in real estate is the government's crackdown on black money. Real estate has traditionally been a appropriate place to position unaccounted money and almost 10-30% of the transaction value is done in cash. The impact of this change will become more strong in the coming months.

Rakshit, Mumbai

24th August 2015

Investors and end users are also in a wait and watch mode following news reports of a huge unsold inventory in the system. Buyers are postponing their decisions, leading to a huge supply overhang. Even so, the industry used to bring forward a brave face earlier, the situation has become suspicious now.

The real estate industry has started taking remedial steps but things will get worse before they get better. Something has to give in otherwise it can't continue like this.

Rameswari, Bangalore

24th August 2015

If somebody ask to me, will the prices fall? I will say yes. However, a correction does not mean that real estate prices will come down by 30-40%. A 30-40% come down mean, there is a crash in property market and it can happen only when the economy goes into a recession. But our economy is doing extremely well now, the GDP is growing at a good pace, inflation is down and PE Investors are investing in both manufacturing and e-com businesses.

Rakshit, Mumbai

24th August 2015

Comment

But don't forget that even a slow rise is actually a correction in real terms. In major markets like the Delhi-NCR, property prices have risen 1% in the past 1 year. Due to the oversupply, the prices are expected to remain flat or register a marginal growth in the next 12 months.

Harilal, Delhi-NCR

24th August 2015

True Harilal,
Apartments that are unaffordable right now might witness demand when the available incomes increase in the next 2-3 yrs. Till then, the residential real estate segment will continue to see time correction. Real estate has lost its charm as an asset class among investors. Not all real estate investors are wealthy. There are ordinary people who bought a 2nd house because they thought real estate would do well. That is one of the biggest reasons why transaction volumes have dropped.

Rakshit, Mumbai

24th August 2015

But we can not forget that the long term investors are holding on, hoping for better days ahead, short-term investors are getting nervous and have started selling below the brochure rates offered by the builders. The only worry for the short-term investors is the drop in transaction volumes. Short-term investors like to book profit in their existing investments before putting in more money.

Nikhil Kanetkar, Pune

24th August 2015

Yes, buyers dream of buying a house could come true if the slow down in realty market continues for a few more quarters. Property prices in most metros have risen at a slow speed in the past 1 year while the cost of capital remains high. The weighted average of supply of real estate and property prices across 11 cities, has registered annualised growth of a mere 1.7% since January 2013 while it was 12% between 2011-2013.

Harmeet Kaur,

24th August 2015

Comment

It is my personal opinion that there is more pain in real estate sector, especially the residential segment. There could be a deeper correction in residential prices. While mentioned prices remain raised, transaction prices have already fallen by 10-15%. Discounts have increased significantly in the secondary market and anguish sales are becoming increasingly common.

Harilal, Delhi-NCR

24th August 2015