Home prices – current scenario & near future

Home prices are likely to fall another 10 per cent in the second half of 2009, as demand remains subdued, says a research report from Crisil Research.
Faridabad in the NCR, Zirakpur and Derabassi in Mohali, High-Tech city in Hyderabad and Rajiv Gandhi Salai in Chennai may see a further drop due to oversupply of residential properties.
Home prices had fallen by 18 to 20 per cent in March 2009, from the highs seen in the first half of 2008, due to the global slowdown, fears of job security and slowing growth in the domestic economy.
However, despite this drop in capital values, home buyers have adopted a ‘wait and watch’ policy’. But property developers contested this opinion, saying prices have already bottomed out. They do not agree that prices will come down further. It becomes totally unviable to cut prices in the ongoing projects.
Prices have bottomed out in most of the markets. We do not see prices going down further. We are getting enormous response in our recently launched projects hence there is no need for further cuts.
The report said cities such as Kochi, Chandigarh and Pune witnessed sharp decline in values and a fall in transactions, as these cities had higher concentration of investors. Once the values eroded, the investors’ exodus started, it said.
Home prices had more than doubled in many cities such as Mumbai, Delhi and others in the past four years up to the first half of 2008, as incomes rose sharply, the investors’ base expanded and credit flowed easily in property. But as growth slowed, the demand for homes collapsed.
However, home prices are expected to stabilise in the first half of 2010 and go up marginally in the second half of the year, backed by lower home loan interest rates and better job security due to improvement in the global and domestic economy.
But prices will not increase the way they shot up in 2006 and 2007. Investors will not come back to the market unless they see prices going up in a sustained manner.
Though a total supply of 1,202 million sq ft of residential property is estimated during 2009-11, as against the demand of 506 million sq ft, Crisil expects all of that may not materialise.
The planned supply is unlikely to materialise in full, due to the credit crunch and relatively sluggish demand; hence, a majority of these projects may get delayed by 1-2 years and a few projects that are still in the planning stage are likely to be shelved. There may be actual supply of around 700 million sq ft, indicating oversupply of 28 per cent in the next three years.
Average lease rentals in the commercial spaces are expected to correct by about 38 per cent in 2009 from the peaks seen in the first six months of 2008, due to a weak demand from IT and ITeS firms and financial institutions.
The areas catering to ITeS and banking, financial services and insurance, like Gurgaon in NCR, Central Mumbai and Hinjewadi in Pune, which saw a sharp drop in rentals between 2005 and 2008, are expected to see further decline of 47-59 per cent due to the slowdown in these sectors.
Actual position will be the genuine buyers may be buying the properties for their use after hard negotiations. So is the case with parties interested on taking on rent. Investors are currently keeping away from Real estate and seeking other avenues. Property developers may be keeping their minimum cost incurred in the property and offering with some profit to the buyers. They cannot go below this until they are incurring heavy interest burden taking loans from private lenders.