However, as the world financial crisis hit the world economy in September 2008, GDP growth of most emerging economies started to dwindle. India was no exception and government & RBI brought in policy measures. In fact, the advent of the global financial crisis in 2008 caused resurgence in Keynesian thought. Interest rates were lowered and government provided stimulus (total spending in the economy) to boost the economy. At one point of time, RBI’s repo rate came down to a low of 4.75% in April 2009.
The impact of financial crisis was severe on real estate market. Some of the large real estate developers started offering discount to the tune of 20% in 2008. The sector began to recover on account of government policy initiatives and lowering of repo rate. However, massive government spending and low interest rates during the period of 2009-2011 resulted in inflationary pressures. And the focus now shifted to tame inflation and thus interest rates started to go up and that resulted in decrease in investment by individuals and companies.
In last 2 years, real estate transactions including office space absorption and home sales have come down. The prices have stagnated in most micro markets.
With this in background, can you, the real estate investor really time the market? It’s highly unlikely; however, one can pay attention to the real estate investment strategies, demand drivers, and supply elements.
1. Real estate investment strategies
2. Demand drivers
Following are demand drivers for real estate sector
Growth in population requires development of housing. Other societal changes such as rise in formation of nuclear families, movement of skilled workers from other parts of the country again require development of housing. Analyze the population growth in your city by following census reports along with indicators for urbanization.
It’s true that setting up of an industry in your region would result in direct and indirect jobs creation which will lead to variety of real estate development. However, pay attention to what kind of industry is this? And what are the income levels of people in your region? For example, real estate prices in Gurgaon have appreciated more because of high income levels of people in the city as opposed to say Bhiwadi (primarily a manufacturing town) where income levels are low.
3. Supply elements
Following are supply elements that affect real estate sector:
As explained above, interest rates have direct impact on the supply of real estate. High interest rates bring down the overall supply. On the other hand, low interest rates encourage investment by both individuals and companies.
Again one should look at the city’s master plan for availability of land. If land supply is limited, it is a good indicator that real estate prices will shoot up faster than expected. And if there is plenty of land available with the city development authority; it will mean price appreciation will be linear. For example, in Delhi, due to limited land parcels, property prices appreciated sharply. However, now, DDA has initiated the land pooling policy and has demarcated new land parcels. It is now expected that availability of this new land will put pressure on existing property prices in the city and city outskirts. Raising the FSI/FAR can also result in softening of property prices. Track those developments.
- Physical and social infrastructure
One should also pay attention to the existing supply of physical and social infrastructure in the city. In certain cities such as Greater Noida, physical infrastructure is in excellent shape. But property prices have not appreciated sharply. This is because social infrastructure which includes industrial development is minimal.
As long as supply and demand are in equilibrium, the returns from real estate investment will be linear. Therefore, as an investor, one should look for distortion in demand and supply curves. If demand is expected to be higher than the supply, it calls for investment in real estate to make windfall profits. If supply outdoes demand then it will yield low returns on your investment.
Can I time the real estate market?
No, it’s not possible to gather data to time the real estate market. Instead, one should solely focus on 3 broad ideas as explained above and only then one should make a bet on real estate investment.