Is the Indian residential market headed for a hard landing?

March 27, 2012 / By

In 1959, Charles E Lindblom, the American political scientist wrote a paper titled The Science of “Muddling Through” in the Public Administration Review. In this he contrasted what he called the “root method” of decision making with the “branch approach”. The root method involves comprehensive evaluation of options in the light of defined objectives, whereas the branch method involves building up, step-by-step and by small degrees, from the current situation. Prof Lindblom claimed that “the root method was in fact not usable for complex policy questions”, and his verdict was that the practical individual must follow the branch approach – applying the science of muddling through.

The residential market in India, particularly in Tier I cities, has remained sluggish for the past 12 months. In these uncertain times, the question arises whether strategic decision making for residential developers to improve sales should follow the root method – a comprehensive evaluation of options, or the branch approach – a process of muddling through. In a multiple stakeholder environment with several large uncertainty input parameters, the branch approach seems to be the instrument of choice.

During good times, prices are invented. When the going gets tough, prices are discovered, hence the term, “Price Discovery”, with developers continually assessing the market with trial price levels to increase sales in on-going projects. To avoid adversely signalling the market, which could lead to a downward spiral, prices in on-going projects are sticky-upward. In the first phase, negotiations are held behind closed doors to test the market’s appetite, and, if sales do not recover, discounts are offered up-front on the table. If there is still no perceived recovery, discounts are advertised to increase visitors to the sales office. This is the stage when the market is said to have witnessed a correction. Since this goes through a process of muddling through, residential prices offered by developers in on-going projects rise like rockets but fall like feathers.

However, during a slowdown, developers try to register sales by launching new projects at much lower prices than the market average. Since new projects have a high construction risk, the lower price is somewhat justified and avoids the adverse signal to the market.

Is the Indian residential market headed for a hard landing? Despite slow sales, highly leveraged balance sheets, expensive finance in a high interest rate environment and rising input costs, developers have been able to avoid a market-wide crash. They have been able to generate sufficient cash flow through the gradual process of price discovery, and several factors such as expecting lowering of interest rates, approval to new projects, moderating inflation and hints of stability of global economies are predicted to tilt the market in their favour in the near term.

This leaves home buyers with a small window of opportunity – the next six months when home prices should witness marginal appreciation. After six months, a second wave of high appreciation is predicted. Are you geared for it?

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