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Across the Board - 3rd March, 2007. Times Property (Times of India)

The major metros are in demand and the absorbing capacity is on the rise for residential and commercial property at the market price or 'justified premium'

Will they fall or will they continue to rise? If they fall will the fall be gradual or abdrupt? And if they continue to rise, will the rate of growth be the same as last year? Or will the rate of growth slow down? Whether it is a social do or a club changing room or colleauges chatting over the coffee machine, "Property Prices" are suddenly flavour of the season. Everyone has an opinion and loves to share it. There is almost a clear divide of bulls and bears on the topic, be they causual observers or players in the industry. Some of the big developers and investors too have a view that the prices will go down. But how does one analyze what 'going down' is? From where and what price would you consider the drop or fall should be viewed? Some of the frequent questions are answered below with my views on them:

Has the price rise been based on speculation? Is this rise a bubble ready to burst?
The speculation driven markets are the ones in the tier two and three type cities. Starting from up north in Amritsar right up to down south all cities have witnessed phenomenal rise. One of the major reasons has been Foreign direct investment (FDI) in real estate. Further backed by local real estate funds and other investor consortiums chasing land and investment opportunities have fuelled the prices up further.
For example; if in a city or metro if seven malls are being built in a five kilometre radius with limited retail players and brands it is obvious on two or three of the better malls will survive. The rest will see a drop in inquiries and hence prices will fall. That it is bubble and it's almost easy to predict that.
The major metros are in demand and the absorbing capacity is on the rise for residential and commercial property at the market price. Most of this is genuine. There is no "Bubble".

Where has the demand suddenly come from? Why has there been such a major price rise in the last two years?
Just like the stock market has reached 14000 levels, from where it was struggling in the last two years. You could also attribute it to FII demand/buying. You could also attribute it to across the board interest from retail buyers.
Similarly, the demand for real estate has come across the board, in retail, commercial and residential properties and more importantly land. Within the segments there are folks who rent and buy. The buying at times is done as investment to get rental returns of the property.

Everyone feels that the prices are going to fall. Is that true?
Unfortunately, it is the buyer's expectation that the prices will fall. Where is that line/dot on the graph from where you can say "FALL"? I would agree that correction is required and almost due, on the expectations by property owners for creating their own benchmark based on couple of sales at higher prices.
For example consider a new apartment building with 12 apartments in Bandra. Suppose now that the developer has managed to sell five apartments at Rs. 15,000 per sq. ft. He then increases the price to Rs. 18,000. Let's say at Rs. 18,000 he sells another three apartments; and subsequently starts demanding Rs. 22,000. Now if he is unable to sell at Rs. 22,000 he will correct his price, may be to Rs. 20,000.
Can this be considered a drop? If yes, then I believe that most properties today are overpriced and will witness a drop.
But I think such an interpre tation is fallacious. I for one would consider a "drop" has happened when the price falls below Rs. 16,500 the average of Rs. 15,000 and Rs. 18,000. Otherwise it is just a correction of a price which any way had no logic.

At what kind of pace do you think the property prices are likely to fall?
Once again, there is no fall. If and when the sellers realise that their pricing is incorrect, the correction will start happening. If we don't start using the right terminology we will land up confusing the poor layman who is waiting to buy his dream property. Loose comments by the so-called experts are taken seriously and a clear explanation of the situation is a must.
Let me give you an example at Andheri west we have recently concluded a deal for a "very premium" office property at approximately Rs 14,500 per sq. ft, the information of which leaked to a few developers in the vicinity. The guys who were quoting Rs. 9000 for their B+ grade properties have got excited for no reason and increased their rates to Rs. 12,000 and a few other developers with projects under construction have started demanding Rs. 14,000. Now this makes no sense at all. These are the kind of properties that will see a major correction.

Will the rising interest rates lead to fall in the real estate prices?
The interest will have an impact on sales to some extent and subsequently lead to correction in prices. But don't expect it to happen overnight and expect it to happen even less in the Metros.