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This is a tricky situation
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How does one think of countering property prices in the wake of rising inflation? A look by K. SUKUMARAN
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The most talked about subject during the last 2-3 weeks has been inflation and the rising prices of commodities of daily use such as foodstuffs. Can the other goods and services remain isolated from this phenomenon? Certainly not. If it is so, what would be the pressure on the property market, and housing in particular?
Housing segment has the following major sub-segments:
* Land
* Materials used in construction such as, cement, steel, bricks, granite, timber and paint
* Wages of labour engaged in construction, otherwise called construction cost.
* Transportation charges
* Cost of funds
* Taxes
* Maintenance cost
The last two are not the direct result of inflation, whereas the first five are linked to inflation.
Inflation, as we all know, is the term used in economic parlance to indicate the value of money or the purchasing power of money. Inflationary graph goes up when there is more money in circulation and less goods for sale. To put the phenomenon differently, the supply of goods dwindle vis-a-vis the demand. In the case of goods of daily use like rice, wheat, oil, vegetable and cloth, one will have to pay more and buy less. In comparison to this, what will be the effect on property?
Unlike articles of daily use, property is not a ‘fast food’ item and its supply cannot be decreased or increased overnight, at least theoretically. For example, the supply of land is more or less static and in order to bring more landed property for sale, if it is agricultural land, only an agriculturist can normally buy it, as per existing laws in many States.
For converting the agricultural land for other purposes, ‘conversion’ procedures have to be gone through. In the case of independent residential houses or apartments and office premises, which will be in different stages of construction, there will be a lead time to complete construction and to hand over the same to the buyers. Again, the buyers would have already entered into firm ‘contracts’ while booking them and the ‘ups’ and ‘downs’ in the cost of construction will normally, have no effect on the price already agreed to.
No clause
In the Indian property market, unlike in the affluent west, booking for plots/ houses/ apartments take place well in advance at the offered/ negotiated price. Further, there is no price variation clause in the sale agreement, normally.
How can the price escalation be ‘tailored’ into the deal? This is a very tricky situation. The fact is that the promoter-builder is at risk of suffering loss, if he has not been able to anticipate the possible rise in prices of construction materials and the consequent escalation in cost. However, as a shrewd businessman, can he afford to incur losses? Because of these imponderables only, the builders start booking the orders at a discount to attract the buyers and gradually raise the price as the sale picks up. Again, all builders enter into contracts for supply of materials required in each project as and when the construction starts and store more materials in case budgetary benefits come by. In case, despite all this, if a loss in imminent, some ‘tricks’ of the trade also come handy. A few of such steps heard in the process of discussions with the market people are:
* Quick finish of the projects on hand
* Aggressive marketing
* Launching of new and attractive projects to off-set the loss in running projects
* Innovative sale promotion
* Discounts for accelerated payment of instalments
* Changes in common facilities like club house, sports facilities and so on
* Changes in post-maintenance commitments and the like
There is a hue and cry about the growing inflationary spiral and the Government has, already undertaken some steps as a result of which inflation seems to have relenting. The important steps already taken are:
* Banning of steel exports.
* Negotiations with the manufacturers to restrict the revision in prices of steel. The inter-ministerial group constituted to suggest measures for containing steel prices is reported to have finalised its report.
* Further reduction in excise duty on cement other than the recent budgetary concessions.
* Relief to small house owners by charging reduced rate of interest on loans up to Rs. 20 lakh.
* Increase in Cash Reserve Ratio to be maintained by banks in order to reduce liquidity and money supply.
Outlook
From the above factors, one can easily come to the conclusion that a wide spread escalation in housing prices may not take place in the near future. A well-informed buyer can also resist any attempt by any quarter to make a quick buck by resisting the temptation to buy. Further, the reported launch of real estate channels can be a boon for gathering full information instead of succumbing to a sort of panic buying.
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Property Plus
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