Downturn - A Temporary Blip
Present Downturn In Real Estate A Temporary Blip
The persistence of inflationary pressure in the market will further affect the recovery in the real estate sector. As the government measures to improve supplies of essential commodities , so far, have had limited impact on controlling prices, RBI is likely to further take harsh measures to push the interest rates up on July 29 when it review its credit policy.
Because of the central bank's monetary measures taken so far to contain inflation, the interest rates on home loan have gone up by 2 percentage points - to over 12% in the last one year. Prior to this, the central bank, in order to contain the rise in the prices of real estate, had curtailed the flow of money to the sector. This has resulted in the rise in interest rates by over three percentage points between 2005 and 2007.
In fact, in the last three years, interest rates on home loan have increased by around 5 percentage points from around 7% in 2005 to over 12% at present. This has led to increase in the equated monthly installment (EMI) on a 20-year loan by a whopping 42%. That means, EMI on Rs one lakh loan for 20-year , increased by Rs 326 - from Rs 775 to Rs 1,101. And on a loan of Rs 50 lakh, EMI has increased by as much as Rs 16,290!
This has affected the demand across the board. Between 2003-05 , because of easy availability of loan at lower interest rates, the price of real estate rose by over 200%. This pushed the land prices in the area also. A senior builder said that at present, the average land cost for the construction of one sq feet comes out to be around Rs 2,000 to Rs 3,000 per sq ft in Noida and Gurgaon. In other areas like Greater Noida, Manesar and Ghaziabad, the land cost in the construction of housing project is in the range of Rs 1,500 to Rs 2,000 per sq ft.
Besides this, as the prices of apartments during 2003-05 went up, builders had also improved the specifications of construction. This led to increase in the cost of construction from Rs (600 - 1,000) per sq feet to Rs (1,200-2 ,000) per sq. ft. The rise in the cost of construction is also due to manifold jump in the prices of raw materials like steel, cement and bricks.
As the land cost and cost of construction increased substantially, builders find it difficult to cut the prices on the finished products to absorb the rise in EMI due to increase in the interest rates. Assotech MD Sanjiv Srivastava said that in the last one year, developers and builders have not increased the prices of their products while the input cost has increased by almost 30% to 50%. Therefore, he said, his profit margin has already been squeezed. And, any further cut on the prices of built up apartments and plotted houses will turn his business into a loss-making proposition.
Another developer said that profitability of many of the projects had turned negative and because of this, many developers had already shelved their projects, particularly in smaller cities like Agra, Jaipur and Chandigarh.
Even in big city like National Capital Region of Delhi, builders have slowed down construction activities. A senior consultant said that the construction activities at present are concentrated in commercial real estate only, where demand is still there. In the residential real estate, he said, as demand has dwindled, developers are going slow in launching new projects.
As inflation is rising to touch 12%, bankers feel that RBI is likely to take measures that will push interest rate further up. If that happens, a banker said, the affordability factor will be affected very badly. This will have a direct bearing on demand for residential real estate. This will also impact the construction activities in the country.
Any slowdown in the construction activities will affect the future supply of the residential units.
However, as demand for the commercial real estate continues to be good, the requirement for residential units will also be felt soon.
The consultant said that if the interest rates goes further up from here, the investors will feel the pinch. As their EMI goes further up, they would like to exit from their investments in real estate sector. This will increase the supply of the residential units, putting downward pressure on their prices.
Therefore, a consultant feels that this could be a good time for the end users to buy their sweet home. He said that it is unlikely that developers will bring down the prices of their products as this would result in a lossmaking proposition. He said that developers would be forced to bring down their prices only if the authorities, which own most of the land, cut land prices. He said that this would be possible if the downturn in the sector continues for a long period.
But at present, it is felt that the present downturn is a temporary blip and the sector will revive as soon as inflation is brought down and interest rates come down. But, that will see the sudden jump in the real estate prices also. Therefore, the end users, consultants and bankers feel, should take advantage of current downturn in the property prices. At present, if you borrow at floating interest rate, you will have to pay high EMI as the rates are high. But, if the interest rates fall, your EMI will also come down.
The persistence of inflationary pressure in the market will further affect the recovery in the real estate sector. As the government measures to improve supplies of essential commodities , so far, have had limited impact on controlling prices, RBI is likely to further take harsh measures to push the interest rates up on July 29 when it review its credit policy.
Because of the central bank's monetary measures taken so far to contain inflation, the interest rates on home loan have gone up by 2 percentage points - to over 12% in the last one year. Prior to this, the central bank, in order to contain the rise in the prices of real estate, had curtailed the flow of money to the sector. This has resulted in the rise in interest rates by over three percentage points between 2005 and 2007.
In fact, in the last three years, interest rates on home loan have increased by around 5 percentage points from around 7% in 2005 to over 12% at present. This has led to increase in the equated monthly installment (EMI) on a 20-year loan by a whopping 42%. That means, EMI on Rs one lakh loan for 20-year , increased by Rs 326 - from Rs 775 to Rs 1,101. And on a loan of Rs 50 lakh, EMI has increased by as much as Rs 16,290!
This has affected the demand across the board. Between 2003-05 , because of easy availability of loan at lower interest rates, the price of real estate rose by over 200%. This pushed the land prices in the area also. A senior builder said that at present, the average land cost for the construction of one sq feet comes out to be around Rs 2,000 to Rs 3,000 per sq ft in Noida and Gurgaon. In other areas like Greater Noida, Manesar and Ghaziabad, the land cost in the construction of housing project is in the range of Rs 1,500 to Rs 2,000 per sq ft.
Besides this, as the prices of apartments during 2003-05 went up, builders had also improved the specifications of construction. This led to increase in the cost of construction from Rs (600 - 1,000) per sq feet to Rs (1,200-2 ,000) per sq. ft. The rise in the cost of construction is also due to manifold jump in the prices of raw materials like steel, cement and bricks.
As the land cost and cost of construction increased substantially, builders find it difficult to cut the prices on the finished products to absorb the rise in EMI due to increase in the interest rates. Assotech MD Sanjiv Srivastava said that in the last one year, developers and builders have not increased the prices of their products while the input cost has increased by almost 30% to 50%. Therefore, he said, his profit margin has already been squeezed. And, any further cut on the prices of built up apartments and plotted houses will turn his business into a loss-making proposition.
Another developer said that profitability of many of the projects had turned negative and because of this, many developers had already shelved their projects, particularly in smaller cities like Agra, Jaipur and Chandigarh.
Even in big city like National Capital Region of Delhi, builders have slowed down construction activities. A senior consultant said that the construction activities at present are concentrated in commercial real estate only, where demand is still there. In the residential real estate, he said, as demand has dwindled, developers are going slow in launching new projects.
As inflation is rising to touch 12%, bankers feel that RBI is likely to take measures that will push interest rate further up. If that happens, a banker said, the affordability factor will be affected very badly. This will have a direct bearing on demand for residential real estate. This will also impact the construction activities in the country.
Any slowdown in the construction activities will affect the future supply of the residential units.
However, as demand for the commercial real estate continues to be good, the requirement for residential units will also be felt soon.
The consultant said that if the interest rates goes further up from here, the investors will feel the pinch. As their EMI goes further up, they would like to exit from their investments in real estate sector. This will increase the supply of the residential units, putting downward pressure on their prices.
Therefore, a consultant feels that this could be a good time for the end users to buy their sweet home. He said that it is unlikely that developers will bring down the prices of their products as this would result in a lossmaking proposition. He said that developers would be forced to bring down their prices only if the authorities, which own most of the land, cut land prices. He said that this would be possible if the downturn in the sector continues for a long period.
But at present, it is felt that the present downturn is a temporary blip and the sector will revive as soon as inflation is brought down and interest rates come down. But, that will see the sudden jump in the real estate prices also. Therefore, the end users, consultants and bankers feel, should take advantage of current downturn in the property prices. At present, if you borrow at floating interest rate, you will have to pay high EMI as the rates are high. But, if the interest rates fall, your EMI will also come down.