Price Correction In The Real Estate Market Has Happened. Here Is How

In the recent past, many, including Reserve Bank of India (RBI) Governor Raghuram Rajan, have been asking real estate developers to cut property prices. But, if you observe the Residential Property Price Index released by the RBI in May this year, it is clear that after peaking in the third quarter of the fiscal year 2012-13, inflation in residential property prices has declined.

Even though the long-run appreciation in property prices has been high, since Q3 2012-13, prices have not appreciated much. This means that real estate developers have not substantially raised prices in this period. In the third quarter of the fiscal year 2014-15, the inflation in residential property prices declined to less than four per cent.

Source: The Reserve Bank of India

(The year-on-year growth in All-India CPI-Housing Index and All-India  Residential Property Price Index (RPPI) show a relative movement in house price inflation and housing rent inflation. During FY2012-13, house prices grew at a higher rate than that of housing rent. However, in the subsequent quarters, house price inflation and housing rent inflation moved hand-in-hand.)

What does this mean for home buyers?

• When home prices are low, it makes more sense for potential home buyers to invest. Many argue that a correction in prices is long overdue. But, house price inflation figures available till now suggest that this has already been happening since the third quarter of 2012-13. As shelter is one of our basic needs, a correction in residential property prices is good for the economy.

• Even though the popular perception is that builders are holding on to property without cutting prices, the decline in home price inflation since early 2014 suggests that home prices are not rising much either.
  
  [caption id="attachment_18880" align="aligncenter" width="855"] Infographics by Sandeep Bhatnagar[/caption]

• The cost of raw materials, and labour has been rising in this period. So, this means that low appreciation in property prices are already lowering the profit margins of developers. So, home buyers will be able to buy homes at lower prices during this phase.

• Real estate developers are holding on to unsold inventory without cutting prices, because they expect buyers to purchase at the price they demand in the coming future. So, buyers may not gain much by waiting too long to buy an apartment in India. Recently, PropTiger.com's Chief Business Officer (Resale) Ankur Dhawan said that instead of waiting for long, potential home buyers should negotiate with developers to get a better deal.

• In Greater Mumbai, for instance, the residential property index rose from 113 to 182 in these three years. This is a rise of 60 per cent. As the long-run price appreciation in residential property has been high, and the short-run price rise has been modest, even investors may gain from buying homes now. This is so, because it is currently a buyer's market. But, the data suggests that the long-run returns from investing in real estate in India is fairly high.