Whether property price will fall?

                                                            By: Dilip Panchmatia

                                                                           B com, L.L.B., A.C.S., A.C.A

It is easy to say that property price will fall. But it is very difficult to say that property price will not fall.

          Let us analyze the various logic on which propagator of property price fall thinking are based. What is discussed is more relevant to Mumbai and particularly to central mill land areas.

MILL LAND AVAILABILITY

Since last four years so many experts are propagating that property prices will fall due to new supply coming from mill land. But in reality price have gone up more than five times.

Why? The clear reasons which experts missed are:

a)     The cost of land i.e. FSI value of the mill land purchases has been very high.

b)    Not a single mill land which has been sold by NTC is coming out with residential projects.

c)     In fact all the mills are coming out with commercial projects. For example the first mill Jupiter auction by NTC, acquired by India Bull is coming out with a three-nineteen storey commercial tower and that is also not for sale, but offered only for rent. Now there are over three thousand parking slot that have been provided. Assuming only 10 per cent of this i.e. 300 top executives are going to look for residential accommodation in or around their place of working – where is the matching supply? And this is the scenario of additional demand coming out of only one mill. Actually, what’s considered as a supply is infact generating new additional demand.

The price economy will goes with demand and supply. Price can fall if and only if more and more supply comes, and it will go up if more and more demand comes.

SUB PRIME CRISIS

People thought due to sub prime crisis of mortgaging bad housing loan in USA, property price will fall in India by repeat effect. But again the reality is different. The criteria adopted by housing loan agencies in India are very much stringent and stiff. In India it is very difficult for a 90 year person to get a loan at 1 per cent interest. And in USA what type of supply is considered? For example it was reported that due to sub prime crisis 11,000 units of houses in USA at one place were sold at 20 percent less price than that in India. Not to talk of Mumbai, this type of supply available is available at one spot. One of buyer based in USA complained that in India these bankers are asking tones of papers while granting loans. The answer is clear that this is the reason why sub-prime will not happen in India.

STOCK MARKET FALL

     Most people in nervousness believe that due to fall in stock market property price will fall.

But what is the reality?

This is only a psychological thinking. In fact most of the stock market related people are worrying due to high volatility in stock and putting their money in-to real estate. In fact, January-08 has recorded a surge in high value property buying in central Mumbai mill land area. Stock market is made for investment and speculation where in the real estate market, majority of people in current boom are actual user only less than (5 %) may be investors.

ABOLITION OF ULC ACT

     Many people are thinking that due to repealing of Urban Land Ceiling Act more land will be released in cities, and therefore more residential supply will come, and the price of property will fall. But actually there was no piece of land held due to ULC in south and central Mumbai .By hook and crook, almost all the prime piece of land are undeveloped or are developed by passing the ULC Act. Major supply may come in Vikhroli or salt- pan land. This will also not at a lesser price.

AFFORDABLITY OF PEOPLE

     To make housing affordable, Government has to take steps to increase supply side heavily i.e. by increasing FSI, relishing BPT, salt-pan land or developing more and more MHADA housing colony.  In the last four to five years due to rapid GDP growth and economic growth in service sectors like Telecom, Retail, Banking, Portfolio Management, Hospitability, Aviation, Biotech, Real Estate, Infrastructure etc have emerged, there by increasing income level and affordability of top executives.

     Those housing projects which are already started and getting completed in near future in mill a land which has now become limited in supply and are the purchasing targets of such people. And there is no seller or reseller in such projects. So how will be the price down?

     It is universal law that what goes up has to come down. But considering the realistic situation stated above the price of new mill land, luxury life style apartments are not going to come down only with the reason that they are in limited supply and when market knowledge grows up, by seeing such large open space, ultra modern amenities, huge parking, construction quality, finishing of the apartment, location, gentry etc. etc, the price of such property is going to go up and up.

How far? Again the simple answer is that if in an old apartment in NCPC, the past area are fetching Rs. 160,000 per sq. ft. carpet rate (2100 sq. ft. carpet sold for 34 crore and that is also not a Freck sale as reported, since around more than 15 buyers are in queue) than in centrally located future mill land area, where far better luxurious apartments are available at less than one third price. As market knowledge enhances price of such property will definitely increase and can be to the extent of old property and old property may fall due to diversion of demand to such advance property. One more factor which is going to take property price further up is having a begging in price market. That is a flow of foreign fund into the real estate market. As it has happened in a big way in stock market, taking the sensex from 6000 to 20000. It is not incorrect to say that the property boom is yet to start!

     Simple answer to this is that property price will fall if and only if more and more supply comes.  As along Demand out steps the supply there is a thin chance to even stabilize the property price.

     Let us analyse the various scenario under which people feel that property price will fall.

Media & Entertainment Education

-         exposure to risky US mortgages

-         Sub prime-related exposure

Repeating of History

- History also not going to repeat. The fact and circumstances are vastly different than 1994-96 property boom and fall. In last property boom majority of Buyers (more than 50 percent) are investors now. There are huge majority buyers are actual users and now few (less than 10 percent) are investors. This means less or no supply. This time there is quality, premium & luxurious life style kind of supply of houses which were never seen before and which is going to limited in numbers not going to come again.

Last time most of the developers were unorganized and having deficit of fund this time more and more developers are getting organised and having no debt of fund affordability. Most of the buyers are impound due to rise in economy and serge in income level. Consider classic example of top level banker, whose father retired after putting 35 years in a nationalized bank. Sum total his entire life salary, it works out to less than his son’s monthly pay package, working at top level in a foreign bank. Unimaginable situation, but it is real.

It is in variance with popular opinion. So get well-in-formed and decide yourself that how far the whims of market will come true.