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Why Property Indexes do not reveal the True Picture of Real Estate in India?
The Indian real estate sector is very diverse with each of its vertical having their own peculiarities and nuances. The residential and commercial markets for example may not follow the same trend in individual areas or localities. These diverse market trends make the job of market analysts a challenge; add to this the dynamics which the real estate sector has gone through in the last few years, it has become very difficult to be able to predict the future market trends for the real estate sector in India.
Several organisations, private as well as government based, come up with their own quarter on quarter (and some year on year) property Indexes. The RBI and NHB are two government based agencies which come out with their property indexes every year. All organisations use different methodology and data points for calculating these indexes. Some consider the loan market and derive their index based on the inventory and loan disbursement data, focusing on the primary market; whereas there are others which account for the actual sale data i.e. the registration of property, available with the various municipal corporations, accounting primarily the secondary market sales and partially the primary market. Generally, these indexes focus on the residential sector, with very few picking up data points from the commercial vertical.
Though such indexes have served as reasonable benchmarks for the real estate sector in the past, these may not portray the true picture in the present circumstances and more so in the future. As already brought out, most of these indexes capture data from the sale of properties with the municipal corporation, unfortunately these data points do not convey the actual ground position. We shall explain this with an example.
Let’s consider a residential property in NCR which was sold at a market value of INR 6.0 crores in 2013. Such a sale generally has two components one is the white, which in this case may have been INR 2.0 crore based on circle rate of that area and the balance of 4.0 crore would have been paid in cash. Such an arrangement is very common in all metros as it saves the seller heavy capital gains and the buyer the stamp duty. This property would get registered with the municipal corporation for 2 crore as the sale point (data point). Now consider a similar property being sold in the year 2015, as the real estate market had dropped the deal was struck at 5.0 crore, however the white component got increased to 2.5 crore due to various reasons. Now, the sale point registered for the property with the authorities is 2.5 crore, which generates a false hypothesis of a market value increase. Extending this example further, let’s say a similar property got sold post demonetisation in end of 2016, as the market had dropped further and no cash component was possible the property was disposed-off at 4.0 crore. However, as the entire amount was in cheque, the property was now registered at 4.0 crore with the municipal authorities. This example illustrates the actual ground reality in all major tier I and tier II cities, across all segments of the realestate in India.
Now, when these data points are picked up, plotted and used by the analytic agencies it generates a false image of a positive growing index, as the property which had been sold for 2.0 crores in 2013, fetched a price of 2.5 crores in 2015 and a whopping 4.0 crores by end of 2016. This would lead to conclusions like “demonetisation has had little impact on the property market, though the sales have dropped, the prices have not come down.”, however the facts are totally contrary to such a conclusion; as, the property which had been sold for 6.0 crores in 2014 was disposed of at 4.0 crores in Dec 2016, indicative of a drop of 33%.
The aim of this article was to educate the end user and perspective buyers to be careful while analysing the Indian real estate market based on various property indexes and not to follow them blindly.