It won’t bring down the roof

Traditionally, the Indian residential market has been dominated by actual users who buy the house for the purpose of their own residence. These buyers are steady buyers who do not sell off their residences or stop paying their home loans just because the prices of their property have fallen.

However, of late, the market has seen a significant number of owners who were buying/booking second or third houses riding on the tax incentives and easy availability of cheap finance. Short term investors who invest during the construction phase and get out when the property is ready to be handed over, had also re-emerged as a significant source.

These are the most vulnerable investors who use short term debt to invest in the market and who will be forced to quit when the prices fall, thus exacerbating the fall further. The entire developer community which has gone on a land acquisition spree powered by formal and informal sources of debt finance, will also be badly affected by any negative sentiments in the real estate market.

The recent slide in stock and commodity markets and the increase in interest rates has seen the dawn of a new sense of realism in the real estate market as well. It is almost certain (or as certain as it is possible to be about future market movements) that the residential real estate market will witness some downward correction in prices.

There is generally a lag between the movements of stock markets and those of the property market. The severe, 30 per cent crash in the Sensex that we’ve seen over the past one month will get reflected (though not to the same extent) in the property markets in the months to come.

Besides, the coming fall in property values may be attenuated by the fact that the July-September quarter is anyway the quietest quarter for the residential market due to a combination of several factors such as monsoon, inauspicious periods and the commencement of academic year throughout the country.

It is a matter of contention whether the correction will be small (about 10-15 per cent) or large. My opinion is that on an overall basis the correction will be small as basic bullish parameters such as genuine growth in demand due to high GDP growth rates, increased pace of nuclearisation of Indian families and increasing use of home loans as an acceptable means to acquire a house are still very evident.

Of course, some specific areas which had abnormal rises may see a much larger correction. But on the whole, the correction in the residential real estate is expected to be small. Which is very unlike what had happened in the previous property bust (1995-96), when prices in some overheated areas of Mumbai and Delhi had crashed by almost 65 per cent.

It is against this background that householders need to look at buying houses. If it is for their own residence, as most buying has been and continues to be, the road ahead is clear. I have always maintained that it is futile to try and time the market when you have taken a long term decision to buy a house in a particular city. In any case, like any other market, the property market will have its ups and downs but a genuine user who will hold on to the property for the long term is unlikely to see a loss on his investment. He also gets the financial advantage of not paying rent (which many see as money going down the drain) but EMI and the softer, non-financial but equally strong pleasure of living in his own house.

However, given the widespread anticipation about the correction in prices a prospective buyer may wait for a couple of months to see how they move. In any case, prices are not expected to increase in the next few months, so there’s no hurry. Having said that, I still maintain my original advice: when buying a house for your own residence, buyers should not try and time the market for low property prices or low home loan rates. It’s best to move in.

As far as investing in property today is concerned, this is clearly not the time for amateur investors. The next three to six months are going to be very interesting for residential real estate space.

The author is director, Apnaloan.com. Views are personal. harsh@apnaloan.com