Is it time to buy real estate?
The consistent escalation in real estate prices is quite impossible to explain. Conventional logic has it that if there is a slowdown and sales are not happening, property prices are going to fall. But despite two years of slowdown, real estate prices have not corrected substantially to attract buyers.
With the festival season starting, both banks and builders are back in action trying to attract buyers through sops like lower rates and freebies. But is it enough?
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The strong argument is – No. And here’s why. While the Reserve Bank of India has not cut rates, except once in April, rates have to go down in the six months or so. Then, it is more likely that banks will start cutting lending rates to push slowing demand and they will cut it down further to single digit levels in the next one-two years.
The savings, and in turn, ability to purchase would improve substantially. A rate cut of 1 per cent on a Rs 90 lakh loan can mean a savings of Rs 15 lakh over a 20-year tenure of the loan. The existing interest rate is 10.5%. If you get a loan for 9.5%, what are your potential savings?
|Saving on |
|Saving amount |
|50 lakh||20||1%||7.94 lakh|
|50 lakh||15||1%||5.5 lakh|
|90 lakh||20||1%||15 lakh|
|90 lakh||15||1%||9.9 lakh|
Property prices too cannot hold on for too long. Being patient, therefore, might help. However, in certain elite areas where there is very little stock, prices can continue to be firm.
Don’t be emotional about missing out on an opportunity or place, as there will be several better options that would come up. Whether it is a home or an investment, it just does not make sense to pay any price for it.
However, if you are desperate to purchase, quote 10-20 per cent lower than the last asking price if you must buy. Even if you buy a house of Rs 1 crore, getting the price down by even 10 per cent, means a savings of Rs 10 lakh of principal amount plus a direct savings of several lakh in terms of interest. This brings me back to a key point, which is “A real estate purchase must always be timed".
Unlike the stock market, where the fluctuations are on a second-by-second basis and hence it is difficult to time, this is not the case in a real estate market. Prices do not fluctuate every now and then and hence it is relatively easier (if you use common sense) to time the real estate market.
For instance, 1997-2006 was a great time to buy real estate, however, many people just stayed away from it until 2003. It is only since 2003 that buying interest came back to real estate. Once you see easy and stupid money being made, more and more people join in. This is how most bubbles are created and the Great Indian Real Estate Bubble was no different. In fact, in October 2007, the real estate bubble had peaked although many people, including developers, were not admitting it until September 2008. However, between March 2009 and July 2009, builders had developed cold feet and many were offering fantastic discounts. In fact even in the secondary market (second sale), prices had come down and were at interesting levels. After the stock market rally that started in May 2009 and the subsequent easing of liquidity have once again taken real estate prices beyond the means of people who actually need it. On the other hand, higher interest rates are also an impediment for people to buy homes as their eligibility has gone down.
The fact of the matter is that as interest rates went up, prices are extremely unaffordable and transactions are the lowest of the last 4 years. We keep reading about it every other day but yet prices are going up.
Since there is no price discovery mechanism or a market to know details of transactions that have taken place, prices do not slide down, as there are no immediate margin pressures. Additionally, individuals as well as builders have a holding capacity and they can wait for a certain period before being forced into a sale.
In case you must still buy real estate now, as I mentioned, negotiate a good deal for yourself. Cash is king and you might be able to get a decent deal. Go in for projects that are complete and ready to be occupied or just a couple of months away from occupation. Due to cashflow issues and excess leverage, we are witnessing projects being delayed and there are a few that are being abandoned (even though several floors have been constructed).
Additionally in cities like Mumbai, many projects are stuck because of lack of approvals from the Municipal Corporation. Also in the wake of anti-corruption drive that is happening, many projects that have flouted the norms or have not got proper approvals yet could be in trouble. It is very surprising to see people invest in projects due in 2016-2018 of some leveraged builders. The silly reasons given are
- I am getting a discount of 15% to the market price.
- I might not be able to get the flat that I want later.
- Everybody has been flouting norms. Nothing will happen in real estate.
The point is that it is better to be safe than sorry and getting out of real estate in a downturn is certainly not an easy task. People have been trying to sell for the last several months even at a discount are finding it difficult to exit.
Since real estate markets can be timed, one must utilise extremely bullish phases to exit the real estate market and enter when prices and interest rates are lower again.
This means that prices have to correct sharply from these levels. A correction of 20-25% or more along with interest rate cuts that we could see in the future will bring back genuine demand and lay the foundation for the next rally in real estate.
Be patient and you are bound to come out a winner. Patience always pays and you must only pay a fair price for a real estate investment as it is a big-ticket item, leveraged, illiquid and occupies a huge portion of your assets.
The writer is Founder, My Financial Advisor