Housing prices could fall 25% more

Property prices have been on a slow but steady decline over the past year-and- a-half. Experts predict that this trend will continue and one can expect a 20-25 per cent further drop in prices in the next year or so.

While interest rate cuts by banks have been comparatively faster in being implemented, largely through the consistent efforts of the Reserve Bank of India, the builder community has been reluctant to follow suit with ready price cuts, even when the uncomfortable truth remains that there is no choice in the matter.

Cutbacks and compromises

Though the initial interest rate cuts and a discounted interest rate for the initial year introduced by some banks resulted in a lot of loan transfers, new loans did not pick up pace on the expected lines.

Another fact that contributed to this factor is the prevalent grim mood of the job market. People are wary of taking on new debt liabilities while struggling to meet their existing commitments. Builders who had been concentrating on high income groups and premium housing needs are now stuck with incomplete projects and lack of funds.

The builders, sensing the buyer's mood, slowly started to relent and made attempts at slashing property prices. Prices have definitely started to slide in favour of the buyer. However, there have been several instances where there have been compromises over the square feet area of the house.

For example, balconies have disappeared from floor plan, 1,000 sq. ft homes are being converted to 850 or 900 sq. ft. in a bid to make space for more apartments in a block, 544 square feet, single bedroom apartments which had practically disappeared are making a come back!

So, there have been a lot of cutbacks from the offerings of several builders to enable slashing of prices and yet not make deep dents in their profit margins.

On the other hand, builders have also entered into tie-ups with banks to offer discounts in the former of special lower interest rates, waiving off the processing fee, slashing the down payment rates, et cetera apart from other discounts of 10-25 per cent on the actual property from their side.

Market reports are suggesting a slew of new launches announced have a price correction of nearly 30 per cent in and around Mumbai and Chennai.

What needs to be done?

As price cuts are now a visible reality for builders they need to make the most of the existing situation and identify new opportunities to counter the challenge of debt and losses they are currently facing due to the credit crunch in the present and the realty boom of the past.

A bit of innovation, some significant changes in outlook and proactive help from the government could pull them out of the current mess.

Innovation could be introduced in many ways. New building materials that are more cost effective could be used, for example use of prefabricated cement blocks can reduce cost by around 10-15 per cent.

A possible tie-up between CMDA (Chennai Metropolitan Development Authority) and private players is in the discussion stages and there is dire need for mass housing needs for lower and middle income groups, which can provide some relief for private players who are currently struggling to finish projects.

Recent statistics reports suggest that the urban population currently at 328 million is rapidly increasing and will touch 576 million in 2030.

This means there is going to be a significantly huge demand for housing. So builders can take heart in the volume of requirements and adapt their real estate strategy accordingly.

Builders are also expecting the government to pitch in and bring down stamp duty charges, taxes, etc to make price reductions more feasible.

A strategic approach to affordable housing

A methodical analysis of income profiles across sections should be matched with housing requirements. Depending on the percentage of population in a particular price segment, housing requirements need to be planned and accommodated. This can be possible only if the authorities and builder groups get together and formulate a plan of action based on surveys and recommendations.

As housing is a key subject during the current elections, things are being implemented at a faster pace. In fact, one such development in the right direction involves a task force set up by the housing ministry in Jan 2008, with HDFC chairman Deepak Parekh in the lead.

The committee has come up with significant ideas like revamping of State housing boards, upward revision of FSI (Floor Space Index), making available land conducive for construction, etc. More such evaluations should be brought to the table for discussion and accordingly new plans should be devised and implemented to evolve from the current situation.

This is a time for review and change. The learning gathered from the past year-and-a-half should be the basis for a brand new start.

The stage is set for a complete change in the real estate scenario that is more 'real' and 'affordable' to enable everyone to own a home.

The author is Head of Content & Research at BankBazaar.com

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