Housing Market continues to increase prices

I don’t understand this hue and cry which real estate companies have been making. They show as if skies are falling for them, but refuse to make any changes in their practices and prices. If any company (or a set of companies) is (are) in trouble and are not able to sell their products, the obvious choice is to incentivise prospective customers. However, such things don’t apply to real estate industry. They drove irrational exuberance and want to continue to live by it (see this article on DLF and Unitech practices by Mint and a primer on economics of home buying in mumbai).

I happened to visit the recent property exhibition at Navi Mumbai by Builders Association of Navi Mumbai and was visibly disappointed. The builders continue to increase prices of properties compared to previous exhibition in 2007. Some seemed to have learnt lessons but are passing off cheap discounts as say 10% off, stamp-duty off etc. This is trivial stuff as the real thing- property prices continue to be high. And despite the government notice to sell property on basis of carpet area, one still has to pay 30%-40% as the super built-up area ( see the explanation here

Now, it is demand and supply basics. They could pass-off these higher prices pre-crisis but if they want to sell off now, they have to lower prices. Why? because there is weak demand.

First, home loans are coming at a higher interest rate. Though banks have lowered rates for houses less than 20 lakhs, there are hardly any houses available for that amount in Mumbai (and I would guess the same for other metros)

Second, people don’t have the kind of incomes they had. Most of  this home buying was driven by people in growth sectors- IT, Finance etc and these sectors don;t have the kind of growth.

Three, people can see now the bubble has been burst with real estate companies losing so much value on stock indices. Financial markets are lead indicators of further trouble to come.

Fourth, the easy money phase is over with foreign money and domestic money drying up. Liquidity may be much better now, but people are wary going forward.

And despite all the trouble no decline in prices.  I have been seeing news channels, reading papers etc on housing markets  and all say the same- hardly any change in prices. I was hearing a radio station where someone from the real estate industry himself said the industry has been thriving on excessive profits for past 4-5 years and that phase seems to be over. However, nothing is being seen in change in prices.

I agree this industry employs large number of people and needs support. But you support an industry which is willing to change as per economics of the situation. All this help from RBI and Government is not going to lead to demand as prices are still too high. And once you include practices (there is just too much information asymmetry between a builder and a buyer, see this), you know the buyer is being taken for a ride.

This is actually a great time to reform the industry and its practices. But there seems to be no effort on this front. What one gets instead is bailouts and cries from the industry.

One Response to “Housing Market continues to increase prices”

  1. Is Mumbai more costly or Delhi? Analysing residential housing prices « Mostly Economics Says:

    […] have risen by 2.5-3 times in all the 5 cities. This is in line with the point I made in previous post – what good are 5-10% discounts when prices have risen […]

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