No opinions here, just hard facts

Over the last 6 weeks since Prime Minister Narendra Modi announced demonetisation, there has been a spate of differing opinions on how it is likely to impact real estate. We’ve had fear-mongering from some quarters, postulating that prices could tumble as much as 30% and wipe out as much as 8Lac crores of value out of the market. Alternative opinions from the builder community, not unsurprisingly, have pointed to prices remaining steady and to demand going up, in fact. And both sides, if I may call it that, have quoted strong logical reasons to back their opinions – the former quoting the component of black money involved in real estate transactions; and the latter basing their arguments on an expected softening of interest rates as well as on thin margins in the industry which don’t allow prices to be cut.

Real estate is a complex, opaque market; how prices move in the next few months would depend on how several price — drivers play out in this period — supply, sentiment, interest rates, rental yields, transaction volume, etc. I’m no astrologer, and will therefore, not attempt to hazard a guess on how much property prices would move in the next few months. Instead, we’ll look at hard data and evaluate trends in real estate as they are actually playing out. To do this, we looked at Magicbricks’ data over the last 5 weeks and asked our data sciences team to glean out insights. And presented here are 4 observations on the actual fallout, post demonetisation. Do remember that this is a market in transition, and we expect these trends to develop over time.

“Asking Price” from owner/landlord segment drop by 4%, at a Pan-India Level

Prices in the secondary market have fallen by only 4% at an aggregate level (when compared for the post Nov 8 period vs pre-Nov 8). Seen at a city-level, the drop is up to 5% in Bangalore. Landlords therefore seem to be largely holding onto to prices and there is no evidence yet of any knee-jerk fall in prices. In the primary markets, developers have bundled deals to attract buyers and refrained from giving outright cash discounts (so far).

The hypothesis that prices would tumble instantly post demonetisation hasn’t played out so far. This serves as a reality-check; it is illuminating to note that sellers can defer selling until they are happy with the price their property fetches. Only in a scenario wherein properties has to sell in a limited time-frame, or a distress situation, are we likely to see any structural fall in prices across the board. So far, the market is holding up.

Supply of properties posted by owners dips by 11%

We find a 11% drop in supply of new owner properties for sale, post demonetisation. Further reinforcing the observation that some sellers, probably with high holding power, have deferred their decisions to sell. When you break this down at a budget-level, the data suggests that properties in the <50Lacs segment are less impacted with a 7% drop in supply volume; and properties >1cr have seen a 17% drop in supply volume. This corroborates with the fact that segments with low-cash are seeing much less drops in supply as compared to higher-budget segment where cash played a relatively larger role.

It would have put huge downwards pressure on property prices if we had seen an increase in supply, with more sellers wanting to exit their holdings in current market conditions. A drop in supply is not good news for those advocating that prices would take a quick tumble. That Real Estate has been more resilient has perhaps to do with the fact that most buyers in the past few years have been end-users and not investors who might have dumped their holdings en-masse. Additionally, it is also interesting to note that we haven’t seen any major changes in the deletion of active listings i.e. sellers who were already in the market haven’t taken their properties off the market yet, they remain active sellers. What this means is that there are fewer fresh sellers entering the market as compared to pre-Nov period.

7% of buyers have shifted from “Buying” to now “Renting”, at a Pan-India Level

We have seen a shift in preference for about 7% buyers whose initial choice was to buy a property but are now looking for rental options after demonetisation. These buyers are choosing to go for a rental solution in the interim period while they defer purchases for property as they wait and watch how the pricing/supply unfolds. The other interesting insight is that the ratio of rent seekers: buyers have changed in this period. This ratio was 1:1.1 earlier and is now 1:1.6; indicating that there is relatively more demand for rental segment in this period. This will be an interesting trend to watch out for. In the short term however, rental demand is likely to increase leading to a possible hardening of rental yields (subject to inflow of rental supply of course).

Status-quo prevails in the primary market, as of now

There has been an insignificant 1% downside in primary market prices, ranging from a 5% dip in some cities to an actual 5% increase in some others. This is unsurprising given the intention of the builder community to hold prices. While there are several projects where developers are running schemes, there is no evidence of any structured fall in prices as yet. Our market intelligence suggests that transactions have fallen, even steeply, in several markets but whether that will lead to any fall in prices is not evident yet. It is noteworthy that in the last 2 years there has been a significant drop in transactions in the primary market; but that led to prices stagnating, but not falling. It is important to watch how trends in the primary market develop since this market, more often than not, also lends direction to the resale market.

In conclusion – This is a market that’s trying to find its feet. The faster it does so, and the faster we hit the new normal, the better it will be for all stakeholders in the industry. One of the key factors that would enable this would be the “price/data availability” to buyers/sellers alike. The transparency that availability of pricing data, plus supply/demand data brings in, would enable buyers and sellers to take decisions more swiftly and with more confidence. We’re going to do our bit to facilitate this. Our recent launch of Price Flash Engine, our tools like PropWorth, are intended to achieve this objective.

In parting, here are a few suggestions to market participants. For buyers, you would do well to remember that this is an absolutely great time to be a buyer. Buyers should get more active, shortlist properties they are interested in & negotiate/make offers to sellers – remember that it is a buyers’ market and, if you’re a serious buyer, you stand a very good chance to negotiate a good deal for yourself. For builders, it would be beneficial to bump up volumes. Consider offering “ floating prices” in which buyers can buy with confidence that should prices fall, they will get the benefit of lower prices later. Sellers should also know that real estate is a very aspirational category, there is a lot of underlying demand, but being obstinate about pricing and allowing volumes to drop is likely to be counter-productive. Top builders can further consider running sales promotions to entice buyers back in the market.

We expect the market to be dynamic and some of the trends discussed above are likely to evolve over the next few weeks/months. So, stay tuned in for updates in due course.