PROPGUIDE − A Complete Property Guide

Understanding Absorption Rate And Its Importance In Real Estate

Loading video...


If you are a real estate buyer and have done considerable research on current property market scenario, you might have come across the term ‘absorption rate’.  This is a widely used term amongst real estate pundits who are charged with the responsibility of analysing market trends and give a clear picture to real estate investors. But how is it important for real estate buyers? Here is the note-

What is absorption rate?

Absorption Rate is defined as the rate or the time that will be taken to sell the existing stock of homes listed in the specific real estate market. Though it sounds like simple mathematics, it holds great importance for real estate investors and experts to assess how the market is performing. Absorption rate is a tool to predict the future of real estate sales in a particular micro-market. It also governs the price rise and fall in a given time.

Also read: Buyers Eye Projects At Advanced Stages Of Construction

How to calculate absorption rate?

In simple words, absorption rate can be calculated by the number of total houses sold in the market in a previous period divided by the months taken to sell them. Here is an example to understand the absorption rate in detail-

Suppose 30,000 homes were sold in past six months in a large urban area. So, now divide 30,000 homes with six months to derive home sales per month. This comes to 5,000 units per month. Now, consider there are 25,000 homes listed on the market. Considering, that the last stock of 30,0000 homes took six months to subside, divide 25,000 with 5,000. The absorption rate so achieved is 5. This means that it would take 5 months to sell off 25,000 homes in the same micro market.

How absorption rate impacts property prices

Absorption rate is instrumental in determining the market activity and home price movement. For instance, consider the absorption rate for any real estate market is consistent at 5 or 6 months. The speeding up of sales can bring the rate to 4.5 months. This can indicate a price rise in future or even in the current time. In short, the absorption rate is an indicator of demand and supply in the market, ultimately guiding the market prices.

Also read: Playing Office-Office: How Commercial Space Absorption Helps Cities Grow

Why is absorption rate important?

  • Absorption rate is used by real estate brokers to assess the property prices on a regular basis that are listed in the market. It is not always that property prices climb up due to change in absorption rate. There are times when absorption rates can go up to 12 months or even more. In such cases, the listing prices changes and heavy bargaining is expected.
  • It can be used to compare the historical performance with the current scenario. If the absorption period is longer than before, it can impact the valuation of the asset as the rate predicts slower sales in times to come.

How homebuyers can use absorption rate

Home buyers can use absorption rate to determine whether their investment can fetch them good returns in future. A buyer should always consider absorption rate of past two years to understand how a particular market has performed and based on this, predict the upcoming time if he/she plans to exit the investment in the next three years. For long-term investors, a careful and regular study of such rates can help him decide when to exit the market and when to hold the investment.

Tags: Real Estate, developers, Video, Apartments, propguide

Residential Projects Being Customised To Meet Customer Needs

As the society inches towards nuclear families, there is a growing need for smaller homes, which are more affordable and manageable. Earlier, buyers used to prefer large apartments. Due to this shift in customer preference, developers are customising their residential housing projects to match the current market expectations.

January 09 2017

+ Click Here To Read This Article

An Explainer: Work Order

PropGuide simplifies complex real estate jargons for you.

June 29 2016

+ Click Here To Read This Article

An Explainer: Amenities

PropGuide decodes complex real estate jargons for you.

May 04 2016

+ Click Here To Read This Article

What Does Zero Period In Real Estate Mean?

If the building project has been stuck due to issues not under the control of developers, authorities can offer the benefit of zero period.

June 22 2017

+ Click Here To Read This Article

#RealtyNewsRoundup: Lok Sabha Clears 4 GST Bills [Video]

Here are today’s top news stories from the real estate sector.

March 30 2017

+ Click Here To Read This Article

#RealtyNewsRoundup: DDA To Re-allot Rohini Flats To Kathputli Residents [Video]

Here are today’s top news stories from the real estate sector.

March 20 2017

+ Click Here To Read This Article

#Budget2017: Affordable Housing To Get Infrastructure Status

After Finance Minister Arun Jaitley presented the Union Budget 2017-18, Prime Minister Narendra Modi said the housing sector stood to gain immensely from the new announcements.

February 01 2017

+ Click Here To Read This Article

Reputed Realty Players Stepping Out Of Their ‘Comfort Zones’, Good News For Prospective Buyers Looking For Choice

India’s reputed real estate developers had rarely stepped out of their comfort zones and local markets. But with the changing perspective of buyers that call for quality housing from developers of repute, a change can be observed. More and more realty players are confidently stepping out of their comfort zones to build demand-based residential spaces.

January 25 2017

+ Click Here To Read This Article

A number of developers have come up with township projects in different parts of Bengaluru....

Raipur administration is planning an 18-acre forest amid the city. The city, which has been ranked...

PropGuide lists five brands you could choose from if you are planning to install a modular kitchen.

Service tax is payable only on property purchase directly from developers and is not required in...

The Goods And Services Taxes has clearned a proposal to charge a cess of 15 per cent on luxury cars...

Noida offers a perfect blend of residential apartment societies, luxury villas and commercial...

A number of developers have come up with township projects in different parts of Bengaluru....

A building code is a set of norms that govern construction of buildings by stipulating minimum...

PropGuide simplifies complex real estate jargons for you.

Prime lending rate is the interest rate at which banks lend to its most credit worthy...

Proptiger has released it's quarterly review report on India's real estate sector. Ankur Dhawan,...

Subscribe Now

To stay tuned with real estate updates


x +

Drop Your Query Here