Friday, February 20, 2009

Prices of starter homes

This is my first post to this excellent blog. Thanks to Vik for the opportunity.

One of the blogs I follow regularly is The Big Picture. Barry had an extremely interesting blog yesterday about home prices (in the US), but the similarities are very striking in India as well.

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

The concept of constantly upgrading your home may not be as common in India, but has the real estate industry in India completely ignored the long tail of non IT earners? Entry level two bedroom apartments in Bangalore seem to sell for about 30 lakhs in a reasonable neighborhood, which given a Rs.30,000 per month salary, is about 9-10 years gross annual income.

Assuming this recession cleans up the speculators in the Indian real estate segment, in my opinion, the resurrection of the realty segment totally depends upon the long tail entry level homes.

I think we are somewhat beginning to see this happen already in Bangalore. From a recent Craigslist ad:

You would be delighted to know that DLF's premium homes project in Bangalore – WESTEND HEIGHTS, DLF BTM Extn. is now being launched as Westend Heights, New Town - DLF BTM Extn. We have completely redesigned the project to bring you an even better lifestyle experience than before to maximize comfort and convenience.

The new mix has come with an unbelievable price!

Apartment area Unit rate

1085 sft - 1225 sft Rs. 2000 / sft
1345 sft - 1410 sft Rs. 1900 / sft
1570 sft - 1820 sft Rs. 1850 / sft

This is an Unbelievable offer .Could you afford to miss it out ......


Is this the start of a trend? Is sanity returning?

14 comments:

Vik said...

Obelix,
Thanks for writing. I'm skeptical of many of these low priced schemes as they seem to a way to lure the rats in with cheese and then trap them. These look similar to the teaser interest rates given by the banks. Too good to be true. If DLF is serious about price drops, let them drop the prices of ready apartments in Gurgaon. IMO it smacks of desparation. However this announcement will sound the death knell of leveraged builders. The biggest to suffer will be end-users who bought under construction apts which will take years to complete and all the guys with loans will be hit by the triple whammy of pre-emi, EMI and rent.

Obelix said...

Vik

That is correct. I feel sorry for those who have put in their life's savings into these apartments in the last 2-3 years.

Kannan said...

Guys,

This is what I know about the DLF project discussed in the post.It was launched as New Town Heights now it has become WestEnd Heights. :)

Other unique features -

1)Most of the apartments carry a additional 50 psqft for orientation & another 50 psqft for greenery..

2)One of my colleague who has booked a apartment there @ a earlier price of 2775..Now they want to him sign a new agreement and have a new apartment..As the current design is totally different from the previous design ,he was not interested in going ahead and asked for money back,but he was told that his money will not be paid back and was told that the builder has the right to change the design anytime he wants..
Previously there were only G+4 floors now its G+18 floors. So the number of apartments in the same area has increased manifold..and thats why the prices have been reduced..you can very well search the net/dlf site for the earlier site plan.
As such you can never be sure if the current design is the one they will go with..If tommorow they change the plan and you want to come out of it ,you cant..you can very well check with them what they are doing with people who have already booked and are not happy with the changed plan,are they returning their money ..If they yes i can give references of my friends for whom they havent done so..
My friend is now worried whether they have actually got the land in dlf name..He was collected 4L on october 2008 saying bda cleareance will come in 3 months,but now they are saying it will take another 6 months..My friend is planning to take it legally with dlf to get his money back.
The manager in dlf has said it seems as per the agreement they have full rights to change the plan @ any date and even if the project is scrapped for any unforseen circumstances ,the customer has no say on it..

3) No approvals yet. Time they have mentioned in the old agreement was 1 year for approval 3years for construction and another 1 year as grace period.

I feel this just new project to create some liquidity means collect adavance of 4 lac for 2000 units. Do your math.Interest free.

Obelix said...

Kannan

Very sorry to hear about your friend. Pretty sad state of affairs.

Anonymous said...

It's not going to help.Job market is heading south and will continue in that direction this year and also the next.
TMZ

Anonymous said...

Rick Santelli on CNBC about Obama's Mortgage rescue plan

-Gadadhari_bhim

Shriniwas K said...

Whatever DLF can prvide for 1800, smaller builder can provide for 1500 with exact same facilities. It is simply because the cost toted by DLF is sustainable cost for the market and smaller (but more experienced) builders can build at a lower cost due to their presence in the field. Does DLF have a gold mine that it can make better homes NO - not for this price. DLF won't subsidize housing either (Like MHADA, HUDCO, CIDCO or DDA, etc).
So the whole mantra of making profit via volume is big farce. Even if one builder beside DLF scheme offers flat for 200 Rs psf less, he will get all DLF customers. People dont want to give a single rupee extra for amenities etc.
The only big factor for real estate remains the same - Location Location Location

Building quality depends upon many factors. Look at Mumbai where the Monsoon devastates all homes of the rich and the poor. THe price reduction by DLF will act as a trigger for smaller builders to drop prices. The whole pack of cards will collapse as once one person reduces, others will also reduce as long as they are not suffering losses. Its the people who have bought at higher rates that will be hurt!

Happy home hunting...

Prashant said...

IMO, DLF and other builders might go bankrupt. So it would be foolhardy to book ANY unfinished flat. The only sensible thing to do in this market is to wait or if you must, then buy a flat that is ready for possession.

Anonymous said...

I love Rick Santelli. He is the only sane guy in CNBC.

HB

Anonymous said...

I hope builders are reading this blog and realising the colossal injustice they are inflicting on end customers by first pumping up prices with the help of speculators and now adamantly holding off to unrealistice prices. They need to ask themselves .. How can end customers who didn't have the means to buy homes when the prices were lower can do so now without taking excessive risk?

Any business that illtreats its main customers this way is set for failure. It is not as if builders are making wafer thin margins .. they have to reduce rates to realistic levels else face the wrath of customers .. I can sense the frustration of people on this blog .. given a chance these people won't ming dragging these builders on the streets and slapping them with chappals .. its just the most of these are decent middle class folks who would never do such a thing even it the opportunity presented itself .. but you as the builders are taking undue advantage of this .. mind my words .. it won't take long for this patience to breach ..

Anonymous said...

Housing is not like sugar or other commodities that sellers are regulated by Govt. Housing is like a free market thing and sellers can charge what they want. If buyers think it is too high, they don't need to buy.

The sellers would have to reduce prices in future to attract buyers. Govt. cannot regulate prices. Govt. can make sure there is no cheating and people are playing by the rules.

It will take a year or two for the prices to go down by 60-70%. It will not happen overnight and any seller/builder will try to sell it at high price till they can get away with it. Now Govt. should make sure there is no CARTEL of builders operating in the country.

HB

Anonymous said...

Dont book any apartment from builders who have a liquidity cruch.Eg-( DLF, unitech). Just imagine if they bankrupt and then who will complete the projects of such magnitude. Go for small quality builder. These multi storie projects take 18-24 months to complete and who knows what the economy will be like. You can contruct a independent house for that price.

Anonymous said...

Housing price transparency? Lot of people gave a feedback that prices have not cooled down even 20% & what these folks are talking about price correction. Some tried to collect data about new prices but it’s all in vain.
To get the corrected price quote, I had suggested to contact builders & show serious interest then in 3-4 bargaining sessions you will come to know the corrected prices. Mr Ravi(prominent RE agent in Pune) is also advocating the same thing to spur the buying. Agreed his intention is different, but this is the only way to get real price quote. All phone, mail inquiries will get inflated price quote.

Why such a covert mechanism?
--If the price cut news will reach to existing customers, it will become difficult for
RE to answer them. They can’t give the price guarantee against
downward risk.
-- They can’t cheat the banks for collateral value.
-- It’s same as closing down the stock exchange when stock prices felled too much.

We neither need any sympathy nor any price reduction. RE can go ahead & raise the prices. Every one knows RE is not there for charity nor we are here for donation. It’s a part of market strategy.

So guys let it fall then only pick up, minimum 50% price cut is guarantee.

Vulture.

Vik said...

bottom line.buy ready possession. now and every time. even the ones getting close to possession I will be skeptical. the finished product quality is important. As we have learned Cash is King.