Price Dynamics in Real Estate
By Aditya Patil & Abhishek Sahni
Accommodation Times Bureau
Factors affecting the price
Long term factors:
A useful distinction in the demand and supply factors that drive real housing prices is between those that have a longer-term influence and those that affect shorter-term dynamics. Factors that influence the demand for housing over longer horizons include
A.Growth in household disposable income
As an economy develops the income of the household increases, the demand for the real estate increases. This leads to increase in the price of the real estate. It was seen clearly during the growth phase in the past five years since 2003-2008. The demand for real estate kept going up and so was the price of the real estate.
B. Shifts in demographics
Younger population, joint family v/s nuclear family, urbanization, relative size of older and younger generations etc are major factors affecting the price of real estate. In India the nuclear family system has lead to the increase in the demand for apartments.
C. Tax system
Long term tax sops might encourage home ownership as opposed to other forms of wealth accumulation. It was seen that once the govt. of India allowed Interest exemption up to 150000 on housing loan and principal exemption up to 100000 on principal, the demand for real estate in India has steadily increased. The increase was lead by service industry as this avenue is both safe and offers twin benefit of Investment as well as consumption.
D. Interest rates
Low interest rates are always as incentive to buy real estate. Coupled with the availability of credit this one factor influences the price of the real estate to a greater extent. Interest rates also need to be seen in relation to the inflation rate in the economy to get a clear perspective of the long term movements of the interest rate.
E. Legal Issues
Any real estate property which is free from legal issues always commands a higher price. In India the requirement is to have between 15-30 years of chain documents to a property. Any property which has these documents usually commands a higher price. This is truer as the land records in most part of the country are paper-based and not computer based and the government doesn’t guarantee immunity from legal issues even on a properly registered real estate property.
The availability and cost of land, the cost of construction and investments in the improvement of the quality of the existing housing stock are longer-term determinants of housing supply. It is seen that in Mumbai prices of real estate are always on a high as the availability of land is highly scarce when compared to other cities like Bangalore, Hyderabad etc.
Short term factors:
A. Housing stock
The growth of the housing stock can be constrained in the short run as a result of a number of factors that include the length of the planning and construction phases and the inertia of existing land planning schemes. This suggests that idiosyncratic, national factors can lead to significant differences in the 68 BIS Quarterly Review, March 2004 dynamics of prices across countries.4 One set of such factors relates to the prevailing conditions in the provision of financing for the purchase of housing.
Liquidity is one of the major determinants of price in the short run, as can be seen in the current market scenario there is very low liquidity. There are enough sellers and not enough buyers. This is affecting the price of the real estate. Each transaction is different and the impact cost is very high.
Taxes like VAT, stamp duty, registration duties etc affect the prices of the real estate to an extent in the short run. These duties form almost 5-15% of the cost of transaction based on the state where the transaction is undertaken. Usually the expectation of an increase or decrease in these duties results in a short increase or fall in the demand of the real estate.
D. Uncertainty about future prospects
The uncertainty about future prospects that follows periods of heightened volatility in housing prices tends to lead to a more cautious response of housing construction to shifts in demand because of the inherent irreversibility of this type of investment.
Factors affecting the price of residential real estate
In addition to the factors mentioned above which affect the price of all types of real estate there are other factors which affect the price of residential real estate both in case of individual homes as well as flats in an apartment.
A. Location & Accessibility
Location is one single factor which affects the residential real estate greatly in each and every part of the country. It is noticed that North and Central India are costlier than South India, which is costlier then West & North-east India. Even within a city different location command different prices, the location closer to the Market, Business district usually commands higher price.
Let’s take the example of Mumbai. Accessibility to the central and south of the city is valuable, both as an amenity and because it is the place where most of the commercial activity takes place. Many households travel all around the city frequently to enjoy the theater, professional sports, restaurants, and so forth.
B. Proximity to Railway Station/Bus stand
The factors which influence the price within a location are proximity to railway station, Bus station, availability of connecting roads, closeness to super market, schools, hospitals and other amenities.
In Mumbai most residents travel by train everyday to reach their workplace so the proximity of a railway station to one’s house is of great importance. Thus, accessibility to Mumbai is accessibility to work. Because office-based employment has been increasing, accessibility to Mumbai should be associated with rising relative property values. Similarly, if theater performances, restaurant meals, and sporting events are luxury goods, households should be willing to pay increasing amounts for accessibility during periods of rising incomes.
C. Quality of construction
Quality of construction has a greater impact on the price of the real estate. As Real estate is a long term investment and any improvements are costly and cumbersome, the high quality of construction commands higher prices. It is seen as a one- time investment rather than frequent smaller expenses on repair & maintenance.
For Ex: Construction by a reputed builder in the same locality is priced higher as he guarantees a higher quality of construction and hassle-free maintenance.
D. Age of the Building
Newer construction commands a higher price when compared to a older construction. The older the building is (given same locality as a new building), it would have higher maintenance costs. The buildings would look much older and hence may suffer devaluation compared to a new building standing besides it. Think of a 12 year old building having an outdated design and a new building having a totally new look. Obviously people would prefer to buy houses in new building.
E. Amenities provided
The price of homes would differ based on amenities provided by builders / sellers. Floor tiles, shower fixtures, intercom facilities, railings are some of the amenities readily provided by the builders nowadays and the cost for the same are included in the final price of house.
Besides these amenities, buyers are charged extra for parking spaces, swimming pool, gym memberships and other luxury items that are now increasingly being included under ‘amenities’ tag.
When the houses are on resale by current owners, the amenities would include Furnishings – safes, cupboards, stands, dining table etc. In such a scenario, the prices for these might be included or excluded depending on the preference of buyer.
The amenities constitute about 5-15% of the final price of home based on type of amenities provide. They constitute about max. 5% only of the final prices in commercial spaces since such high range of amenities are not required.
F. Floor location for a multistory building
Another very important factor for the price determination is the Floor location.
It has been observed that the price varies from floor to floor in the apartments/towers. In Mumbai, the higher you go, the rates per square feet goes on increasing as not many people like to own a flat which is on the ground floor, Whereas the trend is not the same in the suburbs of Mumbai and Thane district. Here the rates go on decreasing as you go higher.
There are a few reasons for this trend
i) Continuous supply of power:
The power supply in the Metros is continuous and hence people like to buy a flat which is located as high as possible so that they get good view, air and light.
ii) Legal to build high-rise towers:
Most of the Towers in the Metros are legal and are allowed to construct high-rise buildings i.e. in excess of 8-10 floors.
G. Future prospects
It is observed that future prospects of a location affect the prices greatly. For example whenever government comes out with Master plan to provide Metro, Rail or improve roads to suburbs, the prices in this location increase suddenly.
For Ex: when Andhra Pradesh government announced the building of New International Airport in Shamshabad, the prices in Shamshabad and all adjoining areas increased suddenly. The same was the case when link road construction was announced. The prices in the location which will be served by link road shot-up all of a sudden.
Factors affecting the price of Commercial real estate
A. Size of the land holding
The bigger the land holding the higher price it commands, as commercial uses require high size of the land. For Ex: Malls, Hotels, Theater require huge size and also in the centre of the city, hence any central location will command a higher price.
B. Tax Benefits in case of SEZ etc.
In case of Special Economic Zones there are several tax benefits available to the companies established in these zones. Hence, the prices are usually higher if it is a approved SEZ.
C. Brand name of the developer
A reputed builder commands a higher price as he assures both quality of service provided and the timeliness in terms of construction. He is also likely to get several complementary products under one roof and hence the higher price.
D. Amenities provided
As in the case of residential real estate amenities like car parking, tiles, lifts, security etc. play a major part as the footfalls are directly related to the availability of amenities in any mall.
E. Footfall expected in case of Malls
In several malls prices are linked to the expected footfalls and the brands which the developer will be able to bring to the mall. As the footfalls increase, the business and profit margins of all the shops/stores in the mall increases. Usually Malls which have a Movie theater and Super Market command higher prices.
F. Availability of ancillary industry, labour in case of Manufacturing facilities
In case of Industries, availability of ancillary industries and skilled manpower influences the price of the real estate, as they are expected to bring down the overall cost of the product. They also help in reducing the transaction costs for the owner of the business.
A healthy competition is always welcome as it ensures the development of the market for the specific product. This also increases the bargaining power of the shop owners for various amenities from the government. For Ex: Surat is a major market for Diamonds.
Even though the prices of real estate is different at different locations, the factors act as some of the parameters which common man/businessmen can use to estimate the price of a real estate property. However, no factor can help more than the expertise of a local expert in the field of the real estate market. It is always advisable to go with the help of a local consul and do a proper research before investing in the real estate market as they are huge investments with very less liquidity.