Very interesting Discussion. Some very positive factors (fundamentals) are in place for India and Gurgaon in particular which are driving the prices up.
At the same time, the reality on the ground is that even though fundamentals are great, these have been over played. The prices started rising over last 3-4 years, first slowly (when recovering from big, deep slow down of 1998-2001) and then the extreme hike of last 15 months or so when India shinin story caught on. Every one tried to jump in (and there could b some nexus of Builder and broker too but who knows). Short term rise has scared many people who are trying to enter the market now.
Every market (take any product category whether it is house, TV sets or restaurents) is like a Pyramid.
At the TOP of the Pyramid, one has a few buyers /people who are typically 1 to 2% who form the top buyers - they like the best quality, flashy choices and are able to pay for it. (In TVs this will be poeple buying Plasmas, LCD TVs, Projection TVs etc.)
Then one has MID segment where people want the best but can normally afford only the medium $ or Rupees. These form 10 to 20% of the market. These MID Segment people make or kill the success of any products. In Electronics field (like TVs, PCs, Handphones etc.), the falling prices bring these people in the fold and market expands slowly which has led to huge boom in Consumer Electronics. Also these people have expanding incomes in India today.
Last, but not the least is the huge BOTTOM of the pyramid which is about 50 to 80% of the market, who want and can afford only what is real value for money.
One thing is certain, Gurgaon Pyramind itself is on a high ground. The bottom layer for Gurgaon itself is higher than other cities including Delhi as there are no super cheap colonies / slums in general. No place for BOTTOM 50 to 80% - Gurgaon has pitched itself to TOP and MEDIUM and is a premier place for living and that is fine.
Now if one sees the Development and price rise for real estate in Gurgaon, there are 2 things happening:
a) Prices have risen for everything in general (General Pric rise)
b) There is a shift (from builders and suppliers) to focus on bigger size, better specification flats.
If someone says that the most expensive flat in Gurgaon in 2002 was Rs. 50-100 Lacs and now it is 250 to 400 Lacs, it is not driven by only price rise but also shift in product.
The problem in Gurgaon may not be price rise only (and which could see some correction and that is normally easier and faster). Taking the TV example, dropping price is easy.
The bigger problem is the product itself and that correction is very difficult to come by. If all the manufacturers are making only Plasmas, changing to our normal CRT 21 inch TV means the manufacturing line has to be changed which takes months if not years.
The biggest problem today is that there are far too many flats being built for the TOP end where only 1 to 2% people (less than 5% definitely) can afford. These are those high end flats like ICON, Aralias ... This will also include 300 and 500 square Yard plots (with or without construction) - all costing 100 Lacs and above.
There are also a lot of so called Medium cost flats costing 35 to 80 Lacs but these can be afforded by only the top end of Medium segment. These are typical segment of Executives, self employed business men (Doctors, professionals) etc.
Bulk of the Mid Segment has salaries in the range of 4 to 8 Lacs per annum and family income of 4 to 15 Lacs. If they do the maths correctly (which some people will not - there was a great article on the calculation in an earlier acrticle in February on this site - Why promises cost more than the real deal?), they can only aford a house of 15 to 30 Lacs (max). There are not too many options being built in this range at all. I could be guessing but this huge buyer market is driving the demand for single floors (which used to cost less for a long time) as well as some society flats even though these are not the best places to stay or even legally correct (some of them) options. People have even gone and bought some flats at 5 to 8 Kms away from Gurgaon main (Ansals Valley View which will take God knows how many years to fully develop the area - try going there at 9:00 PM and it will scare one to death but people are buying just because that is all they can afford).
IF a slowdown comes (which it seems likely), I think there will be 2 phases of correction:
A. Immediate price drop of 10 to 20% which will lower the prices for everything
B. Longer term product change - bigger share of medium segment flats. This will help lower the effective cost for buyers(please note I did not say lower the price as specifications will be different). I see 2 big problems in this happening though:
- If all the land near current main Areas of Gurgaon is already allocated for all the TOP segment / expensive flats, how to change those to MID segment ones? Is there any land left for medium segment flats at all? DLF was forced to do this in 1996-2000 when it came up with Ridgewood etc. starting at 1000 p.s.f. and since DLF had so much land it did not matter to them.
- what can be done for plots - either sale by floors will go up even for HUDA plots (like in Delhi) or prices of plots will drop even more to make it affordable. If that happens, it will lead to plots falling by a huge 10 to 50% over 1 to 2 years (on top of 10 to 20% immediately). I hope HUDA does not get bribed into allowing the plots to be converted to floor sales else Gurgaon will become mad place to stay as plots originally allocated for 1 family will be used by 3 or 4 or even more. Pressure on resources (roads, water, electricty....) will be crazy. HUDA has set the minimum price of 5500 per square yard for plats. The real prices will come closer to that slowly.
This long term correction will keep happening till normal inflation plus India and Gurgaon strong funadamentals catch up.
Above is just a hypothesis based on some solid Market dynamics (Pyramid etc. which no one can dispute) which is ALWAYS true, some market information on salaries (which is also based on som solid data), some market trends BUT still no one knows for sure. Buyer Beware.
