Price Dynamics in Real Estate

iBy 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.
F.Other Factors
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.
B. Liquidity
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.
C. Taxes
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.

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