The surprise of Reserve Bank of India’s cutting the lending rates by 50 basis points that the real estate sector got just before Diwali this year (2015) is likely to push home sales. But, is it sufficient to address the current situation of the real estate market? On one hand, opinion in the market is to tackle the issue of high housing prices and on the other hand, developers are quite reluctant to bring down prices to maintain profit margins.

Current market scenario

The sales halved in the first half of 2015 as compared to a year ago. The debate is whether the rate cuts now can help the sector to clear out the unsold inventories or price rationalization is a must. The experts say that the banking sector cannot give a cushion to the real estate sector solely. The developers have to reduce property prices at the same time to increase consumer demand in the market.

The experts observed that property prices have increased by merely 1 per cent in the past one year. Due to piling up of huge stock of unsold inventories, there is oversupply of plots or flats in the market. Analysts predict that the real estate prices may be stagnant or witness marginal growth in the next 12 months. Property prices have increased by 6 per cent in major cities, though at the cost of sales.

Why are developers not reducing prices?

The developers are not reducing their prices because they feel this will hit their profit marginin the long term. Many cash-strapped developers are offering discounts, throwing freebies and providing innovative payment schemes to attract buyers. These are an indirect way of reducing prices and enticing customers to purchase homes in their localities.

As the developers are not able to deliver the properties on time, there is fear among consumers. Many buyers are not able to take a decision of investing in properties because of such uncertainty. The issue becomes worst when buyers have to pay the home rent and the housing EMI at the same time which becomes a huge burden.

For this, developers are offering schemes to attract buyers. Firstly, the subvention scheme is when home buyers pay 10-20 per cent of the price of the apartment at the time of purchase.The balance amount is paid by the bank to the developer as a loan, under a three way agreement between the developer, the buyer and the bank. During the time the project is under construction, the developer pays the interest on the loan to the bank. The buyers start paying the EMI only when they get possession.

Then there is the Possession Linked Plan, which can be of great help to the buyers for selecting a property of their choice. Some developers give out the first part of the payment in a few months’ instead of a one-shot payment and the second part is paid at the time of possession. This payment plan suits everyone because the duration between the first and the second (on possession) part is usually 1-4 years. These types of benefits are some indirect ways of price reduction that the developers adopt to attract buyers and also increase sales.

Building Trust

Moreover, according to the rating agency Crisil, “the Real Estate Regulation and Development Bill”, if implemented, can further build the confidence level among the industry. This will also help to boost sales and build trust among buyers. The bill aims to provide a uniform regulatory environment in the real estate sector and will deal with the issues of black money, corruption, red tapism, land mafia and corruption. The experts believe that the bill can help to boost demand in the market as well.

The real estate sector is in a state of bubble due to falling sales and rising inventories. The current housing prices are unsustainable and there is an urgent need to rationalize property prices. Depending only on the banking interest rates may not help the industry to boost growth. The need of the hour is to reduce property prices in major cities, which will help to ease out unsold inventories in the near future.

Namrata Kath Hazarika is a part of the Magicbricks- Content & Research team and analyses industry trends and scenario