Over the past couple of years Realty prices in Mumbai have been at an all time high reaching unrealistic and unheard of levels. One frequently comes across news articles about apartments in South Mumbai fetching a mind boggling 1 Lac per sq-ft or more. This has given many a perception that the Property Market is riding a positive wave thereby misleading owners into believing that they can charge any price for their property. Buyers too by virtue of their persona and buying behavior have unwittingly played their part in jacking up these prices artificially.
Let me explain how this works: Any given market has a supply side and a demand side.
When Supply is more than the Demand, Price Decrease!
When Demand is more than the Supply, Price Increase!
Ever since 2011 most realty experts have been predicting a 15-20% price correction due to which a number of prospective buyers have deferred their decision to buy but despite the plummeting demand, which should drive prices downwards, it is Remarkable and Astounding that prices continue to remain stable and in some cases have even increased thereby flying in the face of the very fundamentals of Demand – Supply economics. Why does this happen?!
We believe that this can be attributed to two aspects:
Problem A: The way in which the Indian Property Market is programmed to work.
First and Foremost, the Govt of India has not even recognized Real Estate as an Industry. Hence unlike other structured industries, Real Estate does not even have a REGULATOR to keep a watch on unscrupulous malpractices in the market. Hence, it is common to hear stake holders getting duped by Builders, Brokers, Counter Parties etc.
Common issues faced are:
Lack of Price Discovery
No Authentic Historical Transaction Data is made available to check price trends
Price of a Property is determined whimsically on the basis of how much my neighbor sold his property for.
Problem B: Artificial demand created in the market by the “Buyer” jacks up prices:
Buyers who have a particular need, do not chose a sole property broker but instead want to engage with multiple brokers in the market. This persona and behavior of the buyer stems from the fact that they feel that by not doing so they may miss out on that one SPECIAL PROPERTY that they feel could be available with a particular broker. However logical this approach may sound, it is a misconception because most properties that are listed in the market have a very high discovery rate thanks to the dense and wide spread Broker network. Hence such an approach is highly counter productive to the buyer’s own interest and feeds the ARTIFICIAL DEMAND which jacks up the property prices.
Property Brokers in India are usually Geographically bound and fragmented in their areas of operations (usually less than 5 km radius from their office). However they have a very strong network with their counterparts and leverage this network for discovery of Information (Property Inventory) which may not be directly accessible to them. (You may have often heard of terminologies such as direct and plus one). A typical property market comprising of buyers, sellers, brokers and their network may looks like this.
Here, each red dot represents a stake holder (buyer, seller or a broker), the outer dots are mostly buyers and sellers, the center dots mostly represent brokers. Links between red dots either represent connections between two brokers or connections between a pair of buyers and sellers via a broker/s.
If only Buyers and other Stake holders took the efforts to understand the Broker’s Operation Protocol and the flow of Information in the market, Problem “B” can be largely solved, Artificial Demands can be squashed, prices will become realistic, rational deal making and negotiations will prevail, fostering a win-win situation for all! We will explain how this Artificial Demand is created, how it undermines interests of all stakeholders and how can it be eliminated by modulating stake holder’s personas and opening up a transparent communication channel in our next blog entry.