Difficult days ahead
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Is the Indian consumer, particularly the home buyer, aware of his future? What are the lurking dangers? Let us have a reality check, says K. SUKUMARAN
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— Photo: A. Muralitharan
Tough times: If you have taken a home loan, watch your wallet.
In these days of ‘top gear’ life, we rarely have time to pause and ponder over issues affecting our long-term interests. We often live in the ‘present’ and try to get the best out of what is before us. There are many examples of this short-sighted approach: the environmental chaos, the possible food shortage, ever increasing prices of real estate, and the oil crisis. While each of these segments has the potential to take the lead, beating others by a mile, let us look into the case of realty in this edition.
The realty industry has its origin in ‘land for the tiller’ theory. When agriculture was the main occupation of the people, and when the population in many countries was limited, land holdings were large and naturally most of the land remained idle. When industrial revolution overtook agriculture, a good portion of land was converted for industrial purposes.
Urban shift
As industries expanded, the need for office premises too rose steeply, bringing in exclusive office complexes in and around towns. When more people shifted to urban areas, demand for housing also went up.
Such a situation gave scope for full-time real estate activity. Accordingly, real estate builders and promoters mushroomed in all areas to cater to this demand.
Building materials and labour formed a major part of the cost of construction, initially. In course of time, land cost became critical. Levies and taxes too began mounting up as the infrastructural support needs increased. A rough estimate of the various cost factors presently (in percentage) will be: land — 25; materials — 25; levies and taxes — 30; labour — 15; supervisory charges — 5. These percentages vary from place to place depending on the size of the project. Interest on funds borrowed also has become a critical factor, which can be minimised to the extent of credit received on construction materials and amounts received as advance booking money.
Inflationary pressures
The recent phenomenon of rising inflation is now threatening to demolish all conventional calculations of cost. There has been a general rise in the cost of various factors of production. Further, interest on borrowings has already gone up owing to the anti-inflationary measures taken by the Reserve Bank of India, especially the increase in Cash Reserve Ratio and Repo rate.
Almost all banks have revised their lending rates, which has upped the housing loan interest as well. Again, there has been a shift in consumer preference from large and luxurious houses to small flats and apartments, in order to keep the EMI low. The special rate of interest on housing loans up to Rs. 30 lakh as per government/RBI fiat acts as an incentive to the borrowers to go in for smaller floor area living rooms, modular kitchen, western shower kits etc.
Corrections
Demand compression and price correction have already set in. May be the graph is not uniform in all cities and towns. In metros, small families have started preferring single-room apartments for reasons such as city-centric location, maintenance problems and parking congestion.
Some have moved to townships around the metros. Others have shifted to two-tier and three-tier towns. Land prices are more or less under freeze. Developers have started offering discounts and freebies. Opening offers include free sites in upcoming projects, zero down payments, home furniture, and lucky raffles with a chance to win even motor cars. In some cities, the developers are holding on to the prices offered earlier as a strategy. Marketing efforts and promotion shows are on the increase in order to attract buyers.
Future of realty
A slippage in the demand is almost a certainty. To what extent the slippage will be and its time span may be difficult to predict. The future of realty may not be rosy. The global inflation, according to experts, will linger around the economies of many countries including India for a while. “Wait and watch” seems to be the best policy.
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