It is a frequent motto used to emphasize the importance that a location has on the value of a real estate property. The heart of the message is clear — if you pick the right spot to invest your property in, you can be rewarded with a handsome return on investment.
The Indian economy is in an interesting stage right now. On one end of the spectrum, signs are pointing towards an economic surge. The Sensex hit an all-time high a week ago, the RBI seems to be making all the right moves to curb inflation and bring stability to the rupee and analysts can be frequently heard commentating that finally it’s a “trading market”. This means the economy is picking up, the share market is ripe for investments and therefore investors and traders can take advantage of the opportunities being presented to earn profits.
However, a quick way to see whether a country’s economy is improving is to simply look at its real estate prices. If real estate sales fall, then real estate prices eventually fall in tandem. This then reduces the value of all homeowners, whether they are looking to actively sell or not. The result is that there is a reduction in home loans granted to those same homeowners. Finally, this reduces consumer spending which results in reduced GDP.
So all in all, real estate prices or sales are a great indicator of a country’s economy.
With the Sensex hitting new highs and RBI Governor Raghuram Rajan promising all sorts of ground-breaking changes to propel the economy (on 6th November, the RBI unleashed a far reaching set of new rules that will allow foreign banks to enter India’s protected domestic environment), you would expect real estate prices to be surging upward. And yet, this is not what is happening.
The RBI has been consistently raising the repo rate, which is the rate that banks are charged to borrow from the RBI- in recent months. These past few days, major banks such as State Bank of India and HDFC Bank raised the rates to obtain loans to purchase houses, and the trend is unlikely to stop as the RBI is expected to continue raising rates to fight inflation.
This all translates to bad news for the real estate market. Home-owners will have a more difficult time obtaining loans to purchase houses. Already, cities such as Mumbai are facing a downturn in the real estate market, despite the mass public perhaps not being aware about it.
Usually, before a bubble “bursts”, price rises begin to slowly drop. This is currently being evidenced across the country. The National Housing Bank’s Residex, which tracks housing prices across 26 prominent cities in India, showed that in the April-June period, 22 cities saw a fall in prices compared to the previous quarter.
Mumbai and Delhi saw prices drop by 0.5 per cent and 1.5 per cent, respectively. While properties in Chennai dropped by 2.3 per cent and properties in Kolkata dropped by 4.1 per cent.
When looking at nominal numbers, which is not comparing to the previous quarter when adjusted for inflation, out of the 15 largest cities in India, house prices actually fell in 11 out of the 15 cities in the second quarter of 2013. This is absolutely alarming. For example, Kolkata saw a dramatic -12.9 per cent drop in prices when adjusted for inflation, and Surat saw a -11.5 per cent drop in prices when adjusted for inflation.
Source: NDTV Profit