Artificial price appreciation: Emerging markets face greater risk

While emerging realty markets generally offer better capital appreciation than established ones, buyers should ensure that the price rise is not unrealistic, as it can hurt their investment

While developers, investors and speculators, are the main beneficiaries of artificial appreciation in property prices, its adverse effects are felt by prospective home buyers and those who want to exit from the given project. Analysts point out that emerging real estate markets are more susceptible to artificial appreciation than established ones. This is because secondary market transactions, which also include old buildings in the vicinity, create a benchmark, as far as the price-point of the project is concerned.

Rattan Hawelia, chairman of the Hawelia Group, maintains that emerging markets usually outperform mature markets but agrees that at times, these emerging markets can have speculator-driven price inflation.

“The difference between the price of a project at its launch and its revised price, cannot be considered as an accurate indicator of appreciation. Real appreciation depends upon various factors, such as the stage of construction, cost due to the developer as per the payment plan and overall vibrancy of a market. It can only be judged after the project is completed and is ready for occupancy,” says Hawelia.

Price variations in the interim period are situational, he explains.

Ravi Saund, COO of JMS Buildtech, feels that so far, the Indian realty market has hardly witnessed any notional appreciation. The market continues to grow, with metros and their sub-markets expanding and smaller cities trying to catch up with economic growth. “India’s middle-class has been investing in property for ages. Property prices have grown four times in the last decade. Various factors determine capital appreciation in real estate, such as demand-supply dynamics, infrastructure, inflation, home loan interest rates, population growth, etc.,” he adds.

See also: Beware! Your property’s price appreciation may not be real

However, during the construction lifecycle of a project, there have been many instances, where apartments have witnessed artificial price appreciation and changed hands many times. This raises the question, on whether there is any mechanism to break the nexus between builders and under-writers (brokers). A section of analysts believe that it must be made mandatory, by law, for buyer information to be available in the public domain. However, this may not be a fool-proof solution, as the value chain of under-writers could be so thinly spread (with some having over 400 staff, plus many sub-brokers) that it will not be difficult for them to resort to block booking, with different names and PAN cards.

Nevertheless, such a law may bring some rationality in monitoring actual demand, if not completely preventing black money from entering the sector, which acts as a catalyst for artificial appreciation. Artificial price appreciation, amidst an overall slowdown in the market, is also a sign of distress. While it may help a certain section of investors, who work in connivance with developers, it ultimately hurts the end-users, for whom affordability is the prime concern, while buying a house.

(The writer is CEO, Track2Realty)

 

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