Why Residential Prices Never Dip in Cities?

Bangalore: In recent past, the interest rates as well as the residential property price have touched the sky resulting in unreasonable EMIs. With the high rate of inflation and oversupply in residential units, that pointing the residential price to come down in volatile real estate market seems to be unrealistic. Instead of going down, the property prices have gone up, reports Amit Shanbaug & Sakina Babwan of Economic Times in an article.

Below listed are some points covered from the related article are:

Enduring investor interest

Pankaj Kapoor, MD of real estate research firm Liases Foras, stated that the real estate market situation is different compared to 1995, where the real estate market had collapsed because of limited economy in the market. “There are hardly any avenues which offer you safe returns today. The stock markets are volatile and gold prices are also all-time high. So, investors look at the real estate sector to park their excess funds. It is not the developers who would have to take a price cut but the investors,” reports Economic Times.

In some cities developers cannot decrease prices because of some investors. Gurgaon-based real estate broker stated that, big investors who look out to invest money during the pre-launch stage of the project will also seek a way to exit at higher rates later but if developers reduce the ticket price then investors will be in jeopardy to sell the property and hence the investor would not invest in the builder’s future projects.

Limited supply

Fewer launches of new projects and delays in project execution are the most important reason for restriction in supply. As per Knight Frank, a real estate consultancy firm stated that the rate of launching new projects has slowed down in 2011. During 2010, 3.61 lakh residential units were launched in Mumbai, Delhi NCR, Pune, Kolkata, Bangalore, Chennai and Hyderabad, whereas in 2011, there were only 1.72 lakh inventories that have come up. The state of decline was more in places like Mumbai, where the demand was less and the supply was more.

PropEquity, a property research firm said that in and around the country there are about half of 9.3 lakh under construction residential projects which are scheduled to execute between 2011 and 2013 are likely to be delayed further by 18 months.

Hike in construction costs

Rising cost of construction is another reason for increasing property prices.  At present, all developers are facing problem regarding hike in construction cost resulting in hike in property price and less demand for sales.

Niranjan Hiranandani, MD of Hiranandani Group cited that “With the cost of raw material like cement, steel and other inputs going up by 25 percent, it is just not possible for developers to reduce the cost, unless the government offers some subsidy”, reports Economic Times.

Various intermediaries

In some places, developers are not the only people in the process of property sale, there are big brokers, underwriters, brokers and sub-brokers who come in the way of sales flow and have their separate margins to follow before the inventory reaches to actual buyers.

Developer cartels also at work

On one hand developers are complaining on the rise in construction costs and on the other hand they have started using their own cartels in the market. Developers as a group benchmark prices for particular locations. According to Economic Times report, a real estate company’s market head said that “There is usually a pattern in which the developers increase prices around the same time”.