Here’s a shock for home buyers who thought the festive season may bring in some cheer: Home prices are going nowhere but up. Prices of mid-segment properties have risen as investors are beginning to shun ‘overpriced’ luxury houses due to poor returns and are now seeking to invest in lower-priced properties. Real estate agents are now pitching mid-income homes which are priced at Rs 40-70 lakh to the rich who were earlier investing in luxury hoomes.
According to property consultant Knight Frank, the average price of luxury homes across 23 key markets globally dropped by 0.4 percent in first-quarter of 2012, for the first time since 2009.
Today, upper class investors too are shying away luxury homes priced from Rs 5- 10 crore. These properties were selling like hot cakes during boom times when property developers concentrated almost exclusively on building luxury apartments aimed at foreign investors or non-resident Indians (NRIs). Despite offering incentives such as a BMWs and gold bars as “free gifts” for buying luxury property, sales in the luxury home market today are down by more than 50 percent compared to last year because of low appreciation in either capital values or rentals, which has made profitable exits even tougher.
According to a report in The Economic Times, “yearly price appreciation in the high-end property segment has come down by 35-50 percent since 2008-09 when investors used to book returns of 15-20 percent on an average. In the last two years, price rise in this segment has plateaued, with yearly returns of only 6-7 percent across the country.”
The crux of the problem is this: Most of the pent up demand is in the lower income housing bracket, with the luxury market being heavily over-supplied.
And it is this demand-supply mismatch which has now lured investors towards mid-level homes too. Delhi has in the last year emerged as the most preferred location for investors because of the high rate of appreciation and ease of resale of property. Take Godrej’s Gurgaon property, for example, where the company sold 50 percent of the flats on the first day of launch! Here too at least 80 percent of the flats are either sold to investors or agents during the construction period and resold once the flats are ready.
“This investor demand is clear from the fact that no due diligence is done before buying the flat. Typically, end-users visit a site three to four times before making their down payment, they do not buy on the first day of launch,” said Pankaj Kapoor, MD at research firm Liasas Foras.
Even though the finance minister has pressured developers to sell unsold inventory, home buyers are unlikely to benefit now that the builders have the backing of investors. One big deal made by an investor can have cascading effects and prices can shoot up overnight. This is more than evident from the high returns investors get in Mumbai and Delhi. “All affordable housing schemes are plagued by investors: you have empty buildings while the needy are being forced into the slums,” said Kapoor.