[ecis2016.org] We bring you a snapshot of the debate raging within the realty sector, triggered by the RBI governor Raghuram Rajan’s statement that builders should cut prices to reduce unsold inventory
The Reserve Bank of India (RBI) in its annual report, had stated that genuine buyers are unable to buy homes, due to the high price of real estate. The report went on to make a case for developers cutting property prices, to reduce unsold inventory. Recently, at an event in Mumbai, the RBI’s governor, Raghuram Rajan, voiced a similar opinion. The RBI report and the governor’s comments, have sparked off a debate within the realty sector on whether developers should cut prices.
You are reading: Should developers reduce prices?
Arguments in favour of a price cut
The economics of supply and demand provide the most powerful argument in favour of a price cut. Whenever supply exceeds demand, suppliers must cut prices to find more buyers and thus, reduce their excess inventory. This happens in all sectors and real estate can be no exception. Amit Kansal, co-founder and MD of 360realtors.in, agrees that there is scope for a reduction in property prices. “There is a mismatch between demand and supply in the market, at present. If prices go down, more end-users will be able to afford housing and this will increase the absorption of inventory,” he justifies. He cites the example of Haryana’s affordable housing projects. “There is no dearth of customers in such schemes, where the price level is attractive,” he points out.
According to a recent report by Knight Frank, most of the leading metropolitan cities in the country have a high level of unsold inventory. The NCR’s quarter-to-sell or QTS (which is the existing unsold inventory divided by the average sales velocity of the previous eight quarters) is the highest at around 19. The QTS for Kolkata stands at around 13, while in Mumbai it is around 12. The lower the QTS, the healthier is the market. Thus, unless developers slash prices, they will not be able to move their unsold stocks.
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Arguments against a price cut
Many stakeholders, however, feel that developers should not reduce prices. They argue that if developers were to cut prices now, it would damage their relationship with the investors, to whom they had earlier sold the units at a higher price.
[ecis2016.org] ‘Reduce prices to attract more buyers’: Raghuram Rajan tells builders
Another argument is that once a developer starts cutting prices, there is no knowing where the downward momentum will stop. “Customers will not buy, even if developers cut prices. They will keep waiting for prices to fall further. This is a slippery slope,” cautions Sanjay Sharma, MD of Qubrex Realtors. He maintains that the slow pace of sales are not because of high prices, but due the inability of developers to offer timely possession. This has made customers reluctant to invest in under-construction or newly-launched properties, which constitute a major portion of the inventory.
Moreover, those against a price cut, argue that developers had bought land in auctions at high prices. The cost of raw material and labour have also climbed in the past three-four years. All this leaves little margin for price cuts.
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The bottom line
When prices were increasing, developers over-invested, thereby creating the present supply glut. Consequently, they are likely to maintain their rates, as long as their pockets allow them to, until they are forced to relent.
In fact, a correction in prices has already begun, though not directly. Many have launched new towers in existing project, at lower prices. “Developers are now offering freebies, discounts and attractive payment plans, all of which amount to a price cut of around 15%,” explains Kansal.
If you like this article, you can also read: Should You Buy a House Now or Wait for a Price Correction?
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Source: https://ecis2016.org
Category: Lifestyle
