Property Market Crisis- A Solution- Real Estate to get Realistic

Property Market Crisis- A Solution- Real Estate to get Realistic

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As per Livemint’s 2015 report titled “India’s worst real estate nightmare” : Home sales dipped 9% to 28,446 units and new launches dropped 47% to 18,887 units. The country’s largest property market, NCR, saw a pile-up of inventory in the January-March period that would take close to 78 months to clear at the current pace of sales. Unsold inventory in NCR in January-March rose 12.63% to 235,908 apartments from a year ago. Still, buyers are taking their own time to make a purchase decision and one of the main reasons is pricing—most of these 2,600 units are priced above Rs.1 crore—a price that’s above the reach of most middle-class buyers.

 

New Approach: Learn and Adapt from international experiences

Low Cost Housing or affordable housing is often considered to be a term that applies only to Poor income group people. Rather it a universal economic barometer which applies to all income group. It’s a very important tool to arrive at pricing decision while undertaking a housing project.

As per Wikipedia, A Dwelling unit whose total housing cost are deemed “Affordable” to a group of people within a specified income range is called Affordable Housing or Low cost housing.

So what is a reasonable home price?  

A price-to-income ratio is considered the most optimum method to arrive at pricing decision in construction industry. It looks at the total cost/price of a home relative to average annual incomes of potential customer.

An April 2013 article in Forbes points out that : The typical, median home in the US cost 2.6 times as much as the median annual income. (For example if average income in an area was $100,000, the median price of a home would typically be about $260,000: $100,000 * 2.6).

A similar scenario emerges in Great Britain as well. A January 2014 article on www.economicshelp.org points out that “First time buyers in London are seeing house prices at a record 7.5 times average earnings. For the UK as a whole, the ratio of 4.3 is still above long term trends.”

An estimate made by Forbes, put the average income of a Mumbaikar at $5900 or around Rs 3.54 lakh (assuming $1 = Rs 60) per year. This means it would need nearly 34 years of annual income (Rs 1.2 crore divided Rs 3.54 lakh) for an average Mumbaikar to buy a home in this city currently. What this tells us very broadly that homes in Mumbai are very expensive. Similar calculations done for other parts of the country are most likely to show similar results.

Taking clues from international average, which our Indian banks also consider in calculating eligibility for loan, a person can invest maximum of 6-7 times multiple of his annual income for a dwelling unit.

Income Group (annual) Price to Earnings Ratio Spend Ability Basic Property Value
500000-750000 7 5000000 4000000
750001-1000000 7 7000000 5500000
1000001-1500000 7 10000000 8000000

 

From above its evident that a typical Middle Class family can only afford a house of Rs. 40 Lac (basic value without interior/furniture or registration cost). Major inventory available in city like Jaipur today has a starting range of 60 -70 Lac. This makes most property non-affordable.

Only factory which was driving such high priced real-estate market was “Anticipated Returns” on value of property over time. Thus it was the investment factor which tempted people to buy even non-affordable properties.

Equation During times of Positive Sentiment Period:

Property Decision = Affordable Dwelling Cost + High Return Investment

As long as property was serving twin purpose of high return and a dwelling unit, the market was upbeat. Though in time of real estate crisis 2015, there was a sudden loss of “anticipated high returns” from property investment.

Now, with decline in expected future return on property investment, the Property Buying Decision is now a simple factory of Affordability.

Changed Equation During times of Positive Sentiment Period:

Property Decision = Affordable dwelling Cost + 0 (even some may put a negative number here)

 

Way Ahead: Real-estate must get realistic

Given the fixed supply of Land available for construction coupled with stringent land acquisition norms, the land will always remain bullish due to demand supply gap. Though there is a definitive need for a shift towards a realistic constructed housing pricing system.

That’s not all. We need to be realistic not only in Pricing, but also in use-ability of property offered for sale. A typical household spends a lifetime in a single property. Thus a decision to buy property is associated with family emotions and future requirements.

In India and especially in cities like Jaipur, an average household typically comprise of two generations (Earning Couple and Dependent Children) and generally three generations (Dependent Parents, Earning Couple and Dependent Children) living together.

Thus a family would at least need a 2 BHK Flat with a provision to accommodate occasional guests and friends. A three generation family would thus need a minimum of 3 BHK flat with provision to accommodate occasional guests.

Affordable House = Good Price + Good Living Space

Given the soaring land prices, the logical way is Optimization every square inch to its fullest potential.

Where to get extra space from?

It’s simple, Just look at your empty walls. One can simply double the available space by using vertical space on walls.

Companies must consider using modern building materials to which requires less space and are fast to erect saving time, space and money. A well though floor plan to create feel of large open space by use of space saving furniture’s can be one amongst several ideas that would drive real-estate industry in time to come.

Even in Jaipur, we have companies like Pronto, who specialize in space saving solutions including wall-beds. They have a live display accommodating two queen size beds, seven seater sofa, 5 seater dining and much more in just 200 SqFt space. Unbelievable, just visit their showroom and explore yourself.

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