In theory, the lack of physical cash — the erosion of cash-linked sales — should hurt real estate prices, creating a negative wealth effect that hurts consumption. The nuances of dynamic: a) almost every developer, mortgage broker and equity/debt investor we spoke to expects weakness. This consensus could in itself be self-fulfilling in the near term; volumes should fall, b) reality might be more complicated: Prices may behave differently across markets and price segments. Demand for lower priced, income-linked housing may not be affected as much. Feedback suggests the negative wealth effect of weaker realty may be more pronounced for higher ticket items (luxury cars, 4W, jewellery, real estate itself). We prefer staples/rural, banks.
The talks we had suggested a) developers have high-value inventory, and banks that have lent to them may see some distress as sales likely continue to falter, b) projects under construction may not actively announce/advertise price cuts; given the potential adverse effect on those who have already bought, c) Roll out of the real estate regulations should weed out weaker developers; new supply growth should slow, d) Developers have already been focusing on creating product that meets income cut-offs; rather than catering to luxury flats. With some pause now, these should continue to sell, e) demand can now shift from the secondary market (more cash) to primary construction, and f) all hope that lower mortgage rates will renew demand.
[sOURCE:-The Financial Express]
