Reality check on Real Estate prices

The realtors are trying very hard to convince the buyers that real estate market has revived. But they are creating their own nemesis by increasing the prices too fast too soon in the past few months, whereas the ground reality points to a supply demand mismatch. Most of the real estate firms are looking for short term gains at the cost of long term growth of the real estate market, by raising the prices at this juncture. The idea of affordable housing is being missed out by these firms.What has happened in Dubai yesterday, may also have a negative impact on the real estate market in india in the near term.

Interest rates do serve as a dampner for growth of real estate market, but high prices are a bigger threat. Wheras, the current lower interest rates scenario for housing finance should have been used by real estate firms to sell their inventory at affordable prices. Dropping sales post September 2009, are a cause of concern for the growth of real estate market. According to a research report the inventory to sales ratio which was at a comfortable level of 2:1 in 2005 has gone up drastically to 12:1 in november 2008. This does not auger well for the orderly growth of the market. The operators are jacking up the prices of projects to improve the valuations of real estate firms, many of whom are slated to raise funds through QIP's and IPO's.

The absence of a real estate index has hampered the orderly growth of the real estate market. NHB's Residex launched in 2007 which presently covers 15 cities, is yet to establish itself as a barometer for determining supply and demand of real estate. Ideally, a rental value in excess of 4% p.a. of the price of the property should act as the benchmark. If people are demanding more than this, we might be moving into the bubble zone. Investors are advised to evaluate all factors before investing in real estate, seek bargains from the sellers to take advantage of the buyer seller mismatch. Better still, it would be advisable to wait for a realistic correction to set in, especially if you are buying a second property for the sake of investment.