Home price indices hit a speed-breaker

Two years of uptrend in prices and costs had led to projects becoming unaffordable.

The National Housing Bank's housing price index for the October-December, 2010, quarter indicates a slowing down of housing price increases witnessed through the year in most major cities.

Another report, Economy and Realty, by international property consultant Knight Frank expresses similar sentiments as it forecast a possible pressure on residential prices and developers' margins as urban markets resist steep increases. Developers are bound to come under pressure in 2011 as costs increase on the back of rising costs of inputs such as cement and steel.

However, developers and real estate consultants while conceding that price increases would be conservative, demand continues unabated particularly in the south, like Chennai and Bangalore and other cities where prices had not increased on the scale seen in Mumbai and the National Capital Region.

Rising demand

Mr Irfan Razack, Chairman and Managing Director, Prestige Group, rules out chances of a drop in prices as costs of construction inputs continue to rise. Demand is on the increase in Chennai and stable in Bangalore where price increases have not been as rampant as in the markets in the west and the north.

The Residex Index gains in Chennai could be attributed to the market being underpriced earlier and finding its balance in the last couple of years.

Mr Joseph Ittiachen, a real estate advisor for a number of leading developers in Chennai, acknowledged there was a slowdown in the fourth quarter of 2010 when the price increases effected in the earlier months gave the market some pause.

Developers did see a reduction in enquiries converting to firm deals. But from February 2011 enquiries have picked up as buyers see that costs are on the increase. For instance, in Medavakkam, a suburb to the south of Chennai, the first phase of a project which was launched at Rs 2,750 a sq.ft is seeing the second phase launched at Rs 3,575.

Mr N. Ananthanarayanan, Director, Srisan Advisors, a real estate consultancy, says price increase could see a slowdown in the suburbs, but in the city centre it is still a sellers' market.

The NHB Residex, the index of residential price movement in 15 major cities has doubled in major cities during the October-December 2010 quarter as compared to the base year of 2007 for which the index has been fixed at 100.

But the momentum of increase in each of the first three quarters has not sustained in the fourth quarter.

Some of the major gainers in residential price increase since 2007 are Chennai, Kolkata and Mumbai, while in Bangalore the prices have relatively stagnated as in Delhi. In Hyderabad and Jaipur the index has dropped as compared with the base year.

Good indicator

However, NHB officials point out that the indices for cities are the average of a number of zones within each city. There are wide variations as each residential zone which may behave differently depending on local conditions.

But for a potential buyer or investor the index is a good comparison of trends in various cities and help choose various locations within a city.

For instance, Chennai itself is based on indices collected for 10 major residential zones in the city. While most of the zones follow the same trend with gains in 2009 and 2010 there is a clear indication of the increase tapering off in the final quarter of last year, there are also zones where the index indicates that prices are spiralling upwards unimpeded.

This is particularly true of central areas in the city that see a large demand with few transactions as the supply is low.

In the Ayanavaram-Purasawakkam-Kolathur zone located in the centre of Chennai, the index has grown six times to about 593 over the base year 2007's index of 100. In the first quarter of 2010 the index was a relatively modest 283. At the other end of the spectrum, Chetpet-Egmore was up to 124 in the fourth quarter against 103 in the early part of the year.

Challenging year

The real estate research report by Knight Frank says that two years of uptrend in real estate prices in India has led to a situation where most of the residential projects have become unaffordable for the buyers.

Also the increase in interest rates in recent months has put further pressure on the buying decision of home buyers and contributed to a slow down in demand for premium projects in cities like Mumbai, Bangalore, NCR and Pune .

Also the rising costs of inputs like cement and steel is adding to the pressure on margins for builders. .

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