Real Estate Economics – Residential Prices to Rise Post RERA
RERA has been implemented with the purpose of enhancing transparency, mitigating information asymmetry and applying a uniform ‘code of conduct’ for developers across various states. It seeks to reduce the volatility seen in the real estate sector in the past, and eliminate the trust deficit between the two primary industry stakeholders – builders and buyers. However, residential prices are likely to rise in the post-RERA world. Here are some reasons:
• The Supply Side Story:
RERA will play a fundamental role in determining the economic framework of demand and supply in the real estate industry. Supply will reduce because developers will now launch only those projects which they are likely to complete within the promised timeframe. (Post RERA, the penalty for time over-runs by developers are huge.)
• The Demand Side Story:
Demand will remain robust but witness a redistribution. Since risk on residential investments will be mitigated, so will reward. This is why we will witness the incidence of high risk-high returns investors thinning down on the ground. Investors will also be low-key because they need to see increase in prices accompanying increase in sales – something they have not witnessed of late.
Instead, there will be more end-users in the market, as consumers’ confidence in developers is a critical component of market sentiment and these are the primary beneficiaries of greater transparency. These end users will largely hail from the middle-income and low-income categories who will look closely at affordable housing. With the Government’s incentives for affordable housing and the easy availability of home loans, we expect end-user driven demand to pick up.
With a pulling-back of supply and a continuous robust demand from end-users, the residential market will soon witness a marginal uptrend in residential prices.
• Costs for Developers:
Apart from the demand and supply dynamics, the holding cost for developers is likely to go up. Essentially, no new projects can now be launched before all approvals are in place. The window of price escalation between ‘pre-launch’ and ‘official launch’ which was earlier available to developers is now shut. This additional holding cost will potentially be passed on to buyers, adding to their overall cost of purchase.
• Land Prices:
The cost of land will go up within city limits as post demonetization, there will be no leeway for diversion of surplus cash from other businesses towards purchase of land. The force-fed transparency post RERA will further make it necessary for developers to use legal funds to purchase land. This will add to their overall input costs and therefore lead to increased end product prices.
On the positive side, end-user demand is stable and some recent reductions in home loan rates by banks will see that the trend continues. Overall, we anticipate a marginal upward increase in pricing for residential units in a market backed by genuine buyers and a lower yet predictable and good quality supply pipeline.