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Revealed
India's Third Giant Leap

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Are home prices set to fall?
Fri, 3 Feb Pre-Open

Investing in real estate or buying a house is becoming more expensive with each passing day in India. Today, most of the low-income and large proportion of middle-income people in urban cities wants to buy a new home or upgrade to a better home, but can't because they can't afford it on account of high prices.

One of the factors that are driving and holding property prices up is the nexus between real estate promoters and politicians. Due to corruption, property prices might stay high in the short term, but in the long term property prices will come down. Politicians invest their black money in real estate and it is in their interest to keep property prices high. Politicians also force bankers to go soft on loan defaults by real estate players and this enables them to maintain prices despite a clear lack of demand.

However corruption cannot keep home prices up for long. This is because corruption has costs and these costs impact property prices adversely. For example, a bank forced to restructure loans to real estate will cut down its exposure to the sector leading to a lack of bank funding to the sector and high cost of loans for consumers. The high cost of loans for the consumer leads to postponing of genuine purchases leading to demand coming off. With the steep rise in interest rates and tight liquidity, real estate companies across the country are facing an inventory overhang. High supply coupled with falling demand leads to prices coming off down the line.

It is estimated that balance sheet of India's top 10 listed developers have a massive oversupply and are sitting on an estimated Rs 310 bn worth of unsold properties. Already, most developers are offering freebies amounting to 58% of the property value and many mid-rung developers are offering discounts of 10% to 15% on a case-by-case basis. The real estate market is witnessing a big drop in sales and a consequent cash crunch for realtors is likely to see a decline in prices.

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