« Back to article

Print this article

SIX reasons why property prices WILL NOT fall in your city!

Siddhesh Joglekar, founder of Estatelister.com lists out reasons why there is little chance of property prices falling in your city.

The Indian Economic Growth has been caught in the global headwinds that emerged from the sovereign debt crisis in the European Union and from the sluggish pace of Economic Growth in the US. With GDP growth in the western world taking a beating, the pace of increase in Indian GDP has also gone down significantly.

In the backdrop of such an economic environment, many investors in Indian Real Estate are now waiting for an apparently long impending correction to take place in property prices around the country.

However, surprisingly enough, the best that they have witnessed till date is price stagnation, or in some cases, a marginal increase in property prices over the past one year.

And we tend to agree. Property prices across the country are unlikely to see significant price corrections of more than 10 per cent in the coming few years.

In this article, we try to decode some of the factors that are working to keep up property prices at such elevated levels.

1. Black Money

It is widely accepted that cash changes hand in majority of real estate transactions that happen across the country. Property and Real Estate are one of the few avenues that still allow black money in the system and thus are a safe haven for such illicit wealth.

2. Loan Demand

With loan demand in the country being sustained at levels almost similar to last year, property buyers are still ready to service loans at apparently high interest rates.

3. Inflation

Believe it or not, high inflation is one of the stark realities of an average Indian's life. With average Inflation in the country having being sustained at double digit levels, raw material and input costs have actually shot up dearly for real estate developers

4. Mahatma Gandhi National Rural Employment Guarantee Act

Success of the Rural Employment Guarantee Scheme has guaranteed wages to a huge rural population which ensures that quality labor is always in paucity and wage prices have skyrocketed in the past three years

5. Leverage

Contrary to expectation, only a few major real estate developers carry significant debts on their balance sheets and thus have trouble in servicing the repayment on such debt. Most Indian real estate developers have fairly deleveraged balance sheets and thus are in no hurry to sell out from their projects.

6. Greed

Finally, if we consider real estate investment to be a risky investment (next only to equity investments), in times like these, a rational investor would expect to get significant risk premiums for any investment that they make in the sector.

Considering that a Fixed Deposit can yield up to 10 per cent per annum (risk-free), it should not be unreasonable to demand an 8 per cent premium over the risk free rate of return. What this translates into is a scenario where real estate prices double every four years.

Siddhesh Joglekar runs estatelister.com