Hdfc Sees Property Slump
Real estate prices in Mumbai, which have slumped since their peak in 1994-95, are set to fall another 10-15 per cent this financial year, according to Deepak Satwalekar, managing director of Housing Finance Development Corporation (HDFC).
The 10-15 per cent fall is expected even if the repeal of the Urban Land Ceiling Regulation Act which was announced in the budget of 1998-99 does not go through. "If the ULCRA is repealed, the fall in prices is likely to be 20-25 per cent," he added.
The fall in prices has triggered off an increase in demand, but in the current scenario, the sellers are investors and not developers. Any forecast of a realty price fall by HDFC is viewed very seriously in the market. This is so as it was HDFC chairman Deepak Parekh who had made the prediction of a real estate price fall when the prices were soaring earlier.
There is presently a supply overhang in the market. The markets in Mumbai, Pune and Bangalore are predominantly investor-dominated, unlike say, Chennai, which has not seen such a drastic fall in prices. In a rising market, builders who have borrowed from financiers sell the flats and then repay the amount at the agreed rate of interest.
However, this does not happen in a falling market. The real estate segment is witnessing demand owing to lower prices and increased affordability, but the sellers are investors who have their funds tied up in earlier projects lying unsold.
"Hence the demand pick up cannot be taken as a sign of revival of the sector, since it is investors and not the developers who are selling," says Satwalekar.
"The fall in prices is the best thing to happen to this industry for its long term survival," says Satwalekar. Though prices have fallen by say 40-50 per cent last year, one has to factor in an increase of 400-500 per cent in 1994-95.
This indicates that there is still a net increase in prices. Affordability, defined as the number of years' income needed to buy a property, has increased - from 20 in 1976 to 4-5 in 1998. "The only way this industry can survive is on volumes and that can happen only if prices fall to affordable levels.
If the sector wants an industry status, it has to contend with industry returns. If you work with volumes on a 20 per cent return basis, volumes will go up significantly but the amount per transaction will come down and the present mindset has to be changed," says Satwalekar.
However, there are signs of interest rates firming up. The sustainability of the growth in business witnessed by housing finance companies owing to the demand pick up depends on the direction of interest rates and buyer sentiment. The lowest rate in the industry is offered by the State Bank of India, at 12 per cent. HDFC offers a rate ranging from 12.5-15.5 per cent. However, if there continues to be an upward pressure on rates, housing finance companies may decide to hike interest rates in the future.