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Buy or wait?

By Krishna Gopalan     July 17, 2007

When Sameer Kumar moved to Mumbai from Hubli around three years ago, he witnessed the runaway real estate prices in the city. The marketing manager at a well-known pharmaceutical company, who commutes for three hours every day by the city's suburban trains, is convinced that he will stay in Mumbai for the next 10 years.

Now he's looking for a place that will fit his budget, but the price increase has been too steep for him. For now, the price rise in Mumbai seems to have stalled. But a few lingering questions remain: Is it time to buy a house or wait for a further correction? When should Kumar take the plunge?

There is no straight answer to this question. Sure, if you look the way prices have moved in about five years in large cities like Delhi, Mumbai, Bangalore and Hyderabad, it is hard to miss the appreciation that residential properties have enjoyed.

Take a look at a city like Chennai, where apartment prices per square foot in the suburb of Velachery increased four-fold between 2003 and 2007. Bangalore's upmarket Koramangala witnessed a six-fold increase in prices between 2001 and now. Surely, an investment made in any of these areas four years ago would have yielded a decent rate of return.

Slowing down

But depending on where you look, the realty story seems to be slowing down. Prices in some areas have been coming down, even as many housing financiers are reporting lower home loan growth rates. Make no mistake, demand for housing is still strong, but the rate of price increase seems to have stalled for now. In Mumbai, the price per square foot for an apartment in the city's plush Malabar Hill has remained stagnant for over a year now. The story in the western suburbs of Goregaon and Kandivli (East) is also somewhat dismal-prices have, in fact, moved south. Cut to Kolkata, where prices have fallen in several parts of the city.

Over the last few months, the signs have turned ominous. Historically, the period from mid-April to mid-June is usually the best term for real estate transactions as there is an increase in volume of residential property. But the last season turned out to be a damp squib. Pranay Vakil, Chairman, Knight Frank, describes this year as a huge slowdown. "We are witnessing cases where developers are registering volumes at 40 per cent of last year's levels," he points out. A residential block with 20 apartments has sold merely half that is available, at a time when the business should be booming.

There have been a few reasons for this slowdown. The rising rates of interest have not helped the cause. Property prices have increased sharply by 60-70 per cent, add to that the additional interest rates, but salaries have increased by around 30 per cent. While they are still high compared to hikes elsewhere, they haven't kept pace with the soaring property prices. Says Vakil: "Salaries have not increased by that much." Interest rates have moved sharply from a level of 8 per cent to 12.5 per cent today-an increase of over 50 per cent. Banks are now reporting lower disbursements as most individuals have stalled their housing purchases.

Lenders, too, aren't euphoric about the price movement and HDFC Chairman Deepak Parekh recently told the media that prices had stabilised. He went on to add that prices had started falling in places where there had been excessive construction. While there is demand for real estate as such, buyers are getting a little wary of paying out huge amounts to acquire property.

Move to Bangalore's Whitefield which plays host to a large number of IT/ITEs names. The story here has been rather disturbing. "Rates have dropped by as much as 25-30 per cent on account of a supply glut with realtors of all sizes queuing up for a piece of the action," says Hari Menon, Vice President (Marketing) of Bangalore-based Mantri Developers. From another angle, the prices in the Outer Ring Road area have increased by 50-100 per cent in the last 18-24 months.

Real estate developers are candid when they speak of a slowdown and it is hard to miss the falling prices. "Yes, buyers are now hesitant. The decision-making process has become much slower for more reasons than one like the hike in interest rates and the socio-political unrest over the acquisition of land at Singur and Nandigram in West Bengal," says Samar Nag, Managing Director, Bengal Shelter Housing Development Company. Arguably, Kolkata has been among the cities that have been most seriously hit by the downturn in property prices though some think that the situation could look up. "Developers who were selling 50 apartments a month, are now selling 30 apartments. I think this is a short-term phenomenon and consumers are probably waiting for 6-8 months for interest rates to come down," says Rahul Todi, Managing Director, Bengal Shrachi Housing.

Buy for self-use

Typically, in places like South Mumbai and South Delhi where supply is still not easily available, prices have continuously appreciated since demand remains unabated. "What we have been noticing is that the prices in the suburbs of most cities have been falling after fresh supply has come in," points out Anshuman Magazine, Managing Director, cb Richard Ellis. That pretty much applies to most cities in India. What is interesting is that the fall in prices has not been entirely because of rising interest rates. Prices reached dizzy levels due to high levels of speculation. To that extent, the current slowdown could well be a correction.

According to Magazine, tier-II cities like Jaipur and Chandigarh witnessed very high levels of speculation. "These cities are now suffering with a correction in prices," he states. Still, it must be said that residential property bought at right prices is often a sound investment decision. "The growth in the economy is expected to continue in the medium-term and prices could escalate. Chary investors may want to invest in the market before prices get out of hand," points out Ravi Ramu, Director at Bangalore's Purvankara Projects.

Don't speculate

An investor will have to be cautious and yet adopt a long-term outlook while investing in residential property. "It is important to have a 3-5 year outlook," says Magazine. That apart, the reason to acquire property too needs to be clearly defined. "If a person is investing for self-use, anytime is a good time. If the objective is one of investment, it will be necessary for him to take a long-term decision," points out Magazine. He cites factors such as location and its positives that need to be considered before deciding to go ahead. "This is definitely not a market for speculation," he states emphatically.

For the buyer, the underlying principle is rather simple and that is caveat emptor. Knight Frank's Vakil explains that the biggest slowdown this time has been in the Rs 15-35 lakh price range. "This has taken place across the country," he adds. If prices appear to be slowing down, it will be possible for the buyer to get some good deals. Vakil, in that context, thinks that it is a good time for the buyer and he can get a lot more from the developer. "He can afford to wait for 2-3 months," he adds.

In a scenario where interest rates are still on the upward path, monthly outflows could still increase. Buyers will have to strike a fine balance between affordability and, more importantly, the right property price. Clearly, be more than a bit cautious. Buy at the right location and bargain hard with the builder. It's going to be a buyer's market now.

- additional reporting by Rahul Sachitanand, E. Kumar Sharma, Ritwik Mukherjee and Pallavi Srivastava


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