Home prices still high despite rising supply

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NEW DELHI: Here's P Chidambaram's concerns about a flat housing market is stark numbers: At the end of December this year, as things stand now, nearly 50 million square feet of housing in seven cities, valued conservatively at Rs 21,500 crore will remain unsold (see table below).

Ajit Parmar has found out the hard way how this remarkable data affects house-hunters.

In the past three years, the Delhi-based brand consultant, who earns about Rs 15 lakh per annum, has made over a dozen failed attempts to buy a house in Noida, a suburb of Delhi.

"I keep deferring my plans, hoping that prices will come down in next three months, but it only moves upwards unhindered. I've revised my budget multiple times, and it's now Rs 60 lakh from the original estimate of Rs 35 lakh. But owning a house remains a distant dream because a ready-to-move-in house costs nothing less than a crore," explains Parmar.

Unlike the rest of the world, home prices in India are refusing to come down, barring a few exceptions in some pockets. This despite an optimistic supply pipeline.

The inventory for 2013 is about 107 million sq ft worth Rs 54,000 crore, and for 2014 it stands at 142 million sq ft valued at nearly Rs 98,000 crore. (All from ongoing projects that are committed to be delivered within these time frames.)

In fact, according to PropEquity, a leading real estate data and analytics company, around 31,000 residential units-conservatively valued at over Rs 25,000 crore and spread across Delhi, Mumbai, Bengaluru, Pune, Kolkata, Hyderabad and Chennai--are lying unsold as you read this.

Niranjan Hiranandani, one of India's leading real estate developers, claims that the value is actually on the higher side.

"Ideally it should be around Rs 10,000 crore. But having said that, it is unlikely to affect prices barring a few pockets," he says.

It is in this context that Finance Minister P Chidambaram questioned state-run lenders last week.

"A huge quantum of capital is locked. Why are banks not putting pressure on them [the builders] to lower prices since you have funded both the builder and the retail home loan borrower?" he asked.

Perhaps the question we should be asking is: Why is the Indian residential market so flagrantly defying the law of supply? Keki M. Mistry, vice-chairman and CEO of HDFC Ltd., has a theory.

"To bring down prices, the supply needs to increase on a large scale. Given the size of the country, there should be a supply of at least one million units every year in order to create pressure on the prices on a long term basis," he explains.

This effectively means a supply of 1,000-1,500 million square ft, which is more than 10 times the current supply.

Another crucial factor dictating property prices is the location combined by the financial situation of the involved developers.

Courtesy: Economic Times