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Wednesday, November 12, 2008

Want to buy a home? Better wait for now!

With more price cuts likely, it is advisable to hold out a little more before investing in property.

Average capital values in posh South Mumbai have come down from around Rs 1 lakh (Rs 100,000) per sq. ft, last year, to around Rs 65,000 per sq. ft now.

Sales have been down, especially since January this year.

According to a Pan-India Property Brokers' Poll by broking firm Edelweiss Securities, over 90 per cent of brokers have seen a drop in transactions over the past one month; almost 80 per cent of brokers have witnessed a reduction in enquiries over the past month; 70 per cent of brokers expect price trends to be flat or negative over the next three months.

In brief, it has been a reversal of fortunes for the residential property market, which till last year was on a bull run.

Despite the current lull, it is an established fact that returns from real estate in the long run are second only to returns from equities. While a slump in any asset class provides an opportunity for rich pickings, should you invest in real estate now?

The downturn
It all began in mid-January, when negative sentiments from the bourses spilled over into real estate, which was already battling rising capital values and mortgage rates.

When confidence in keeping your job diminishes, it is hard to borrow from future earnings.

Says Pranay Vakil, chairman, Knight Frank India: "When you are hypothecating your future earnings, the confidence that your income stream will continue is a prerequisite. When people begin to have doubts in this regard, they begin to slow down on big-ticket purchases."

So, by how much have the prices come down since January 2008?

"On an average, prices have come down by 15-20 per cent," says Vakil. However, the property market is not homogenous and the degree of price deceleration will vary across locations.

A study on capital values between January 2008 and September 2008 done by Makaan.com, a realty portal, of 120 locations across Delhi NCR, Mumbai, Bangalore, Chennai and Kolkata gives us some pointers. "We find that 58 localities out of 120 have shown a negative growth. The magnitude of capital value erosion ranges from 1 per cent to 13 per cent," says Aditya Verma, vice president and business head, Makaan.com.

The developers' response
With all regular sources of finance drying up, developers have been trying to woo customers with freebies. Their efforts gained more strength with the festive season around. Sales used to pick up at this time of the year during the heyday of the property market.

"This Diwali may not be as promising," warned Vakil. "Everyone is trying to catch the bottom. Everyone feels that the prices will fall further," says Anshuman Magazine, chairman and managing director, CB Richard Ellis, South Asia.

Should you invest now?
"For the investor, this is not the right market," says Vakil. Prices are expected to fall further. "In the next six months capital values are expected to go down by another 15-20 per cent," feels Vakil.

Most developers have pinned their hopes on sales picking up this festive season. If that does not happen "then you will find that around the third week of November developers will actually start reducing prices. It will go on for six months, where you will see reduction in prices and improvement in sales volumes," says Vakil.

Verma offers another view for prices reduction in the near future. "If sales do not pick up by the end of this year, developers will start reducing prices as it will be the last quarter of the financial year. It will be their last attempt to improve sales. So what the developers are offering right now is just the topping. If you wait for another 2-3 months, you will get the cake too," says Verma.

So if you have waited this long, it makes sense to wait a little longer.

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