[ecis2016.org] Inflation does increase costs but sometimes, in order to placate buyer sentiments, real estate prices could fall during such a pessimistic phase. We explain the connection between inflation and real estate
For a lay person, inflation is one of the biggest factors affecting a majority of their purchases. This, despite the fact that inflation doesn’t influence the price of all commodities uniformly. Technically, there is no direct link between inflation and real estate prices. However, it is one of the underlying factors that plays a significant role in influencing the prices of properties.
You are reading: Inflation can decrease property rates
When inflation in the market is high, the RBI may increase or refrain from reducing the repo rate, which is the rate at which it lends money to banks. This will make the cost of credit higher. Consequently, home loan interest rates are likely to remain high.
Usually, people become averse to any kind of debt (including applying for a home loan) when the interest rate increases. “Given the increase in prices and a relatively lesser increase in my income, we have stalled our plan of buying a holiday home in Lonavala,” points out Ankush Jain, a resident of Mumbai. “I was saving up for a down payment for it but I think I will hoard the cash rather than make a large financial commitment.”
This could result in reduction in prices due to the developer’s fear of a severe business slowdown. This may eventually induce property developers to cut down on cost or bring in innovative pricing strategies to revive buying sentiment.
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A price drop is not necessary
However, the developer could also proportionately hike prices if the cost of land, construction, and inputs (steel or cement) increases. To this extent, inflation does affect prices. Also, the price rise depends on the demand-supply ratio in that micro-market, besides infrastructure, connectivity and amenities.
The Indian real estate industry has seen a period of policy paralysis and a slowdown in buying,” explains Gaurav Shah, director sales and marketing, Ravi Group. “Inflation will result in a further slowdown of the realty industry, as the developers will push their costs to the consumer, thus, increasing the property prices. There are not enough buyers in the market who buy homes during an inflationary period.”
According to Ameet Hariani, managing partner, Hariani and Co., in certain pessimistic phases, the prices of homes may not increase even if there is an increase in the cost of inputs. For example, between 2011 and 2015, the price of real estate in several micro-markets, have either remained stagnant or have fallen albeit, there have been inflationary pressures in the cost of inputs.
On the other hand, the real estate market could witness inflation despite no fluctuation in the price of inputs. It’s an overall cyclical phase when prices of real estate tend to rise irrespective of costs.
In most cases, bigger developers do not reduce prices when inflation reduces demand because they have a much better capitalization though they do not increase the prices either. However, a long span of inflationary pressures, can lead to an increase in price points, as it causes pressure on the borrowing cost directly. Overall, the core cost of inputs like cement, steel, and labour, coupled with other costs like land acquisition and finance, has led to a significant increase in prices across several markets all over the country.
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