Rising Prices of property pull down its demand

Rising Prices of property pull down its demand

Soaring property prices and rising interest rates are likely to crimp consumer interest in housing. In some cities in India such as Delhi and Bangalore, realty prices have sold by 40% over the level of January 08 the pre-melt down peak.

Analysts tracking the sector say the sales of residential properties are down in centers such as Mumbai and Delhi because of the high prices.

Apart from the prices, Increasing interest rates are also paying a part. There is also an expectation that reserve bank may hike policy rates pushing up interest rates further, in a bit to control spiraling prices. The reserve bank had earlier tightened the norms for leading to realty firms by increasing the risk weight of real estate loans, and limiting the value of home loans 80% of property values.

Ironically however, developers are likely to see increased sales and margins because of the higher prices. One concern expressed by Fitch is on the high debt levels of many of these realty firms. If there is a slowdown in sales, some of these firms may not have enough cash flows to repay their loans.

In that case similar developers may start bringing prices down, in an effort to improve sales and cash flows. In the short run however that is not very likely. For December quarter, the consensus is the real estate companies are likely to see a strong growth in sales and profit numbers.

While real estate firms are expected to do well financially they have been underperformers in the stock market. Stock prices of realty players have been hit by a series of scandals, including the 2G scam and bribe for loan scam which have hit valuation of the sector.

The housing plots in Greater Bangalore have seen an appreciation of more than 30% in last 2 years itself. Places such as Byhappanahalli and Horamavu, has seen an unbelievably high increase in their face value.

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