How inflation impacts the property market in Patna.

5 Apr

 

 

It is interesting to note how most people think of inflation in Patna. The most prevalent concept of inflation is what happens to spectators at a cricket match. At some point during the match, the people in the front rows of the stadium rise to their feet to get a better glimpse of what is happening on the field. As a result, the spectators in the back rows cannot see the action clearly so they rise too. Very soon, everyone is on their feet. Another perception is that inflation drives up the prices of everything uniformly. This is why it is commonly believed that real estate prices in Patna rise simply because the cost of everything else has also risen. This is incorrect. The fact is that the real estate prices in Patna will either fall or remain static in an inflationary economic environment.

Inflation is dynamic and is largely dictated by the cost of credit. This is how it works – the cost of essentialities such as food grains and petrol rises, while the common man’s income in Patna remains the same. In other words, his spending power reduces. Banks make a note of the fact that the baseline cost of living has increased and recalibrate their loan interest rates upward.

Because the cost of borrowing has increased while incomes have remained static, people become wary of taking loans for anything – including home purchase in Patna. The natural reaction from real estate developers in Patna would be to bring property prices in Patna down so that sales pick up again. This does happen in some locations, but not everywhere in Patna. The reasons for this are discussed here.

Many developers in Patna are as dependent on the cost of borrowing as their buyers are. This is especially the case with smaller developers in Patna who have not launched many projects in Patna and have therefore not been able to create a self-sustaining churn of capital. Such developers in Patna react to the reduced sales brought on by inflation by lowering their rates.

Such developers in Patna are able to do this because though the overall cost of development remains more or less constant, land acquisition costs are still lower in Patna as compared to metros. Price reductions are the last recourse for ailing developers in Patna, but smaller developers in Patna with lower investments in Patna and greater dependence on the cost of lending, can and will offer if they perceive this to be the only option.

Even if this last course of action fails, the developer in Patna goes bankrupt and is forced to surrender all business interests to the bank, or sell them to a more established player. This is one of the integral factors of the process of consolidation, wherein more and more smaller operators give way to larger players.

The scenario is different for larger developers in Patna who are active in Patna. Having been in the real estate business longer, are able to achieve a degree of capitalization that reduces their dependence on debt funding. However, their investments in the land in Patna  required to build projects are naturally higher.

Such developers are not able to bring down the pricing of their properties in Patna despite a slowing down in sales. However, they are able to weather the inflationary storm longer because of their healthier capitalization. For this reason, established developers in Patna will not use price reductions to boost inflation-impacted sales. At the same time, they cannot raise their prices in tandem with the natural laws of property appreciation, since this would impact their competitiveness in the market.

This means that in the case of well-located quality projects by established developers in Patna, inflation will have the effect of keeping prices static until reduced inflation brings down the cost of credit. Once this happens, prices of property in Patna will rise again without having gone down at any point.

It goes without saying that understanding how inflation impacts short and long-term property pricing in Patna, locations and projects can make a big financial difference to prospective home buyers in Patna.

Housing in Patna and Urbanization

29 Mar

 

 

Urbanization in Bihar has generated huge demand for housing in Patna for which neither Patna or neither any other city of Bihar nor the housing sector in Bihar is prepared for. Besides an annual rise in the number of urban agglomerations resulting from the population growth and the development of new urban centers, an increasing deficit in housing supply coupled with rural migration will result in the proliferation of slums in Patna. This urban explosion cannot be ebbed, but needs to be catered to through a comprehensive and immediate change in development control norms like FSI limits, land use patterns, building norms, etc and through policy measures related to release of land parcels, taxation, finance and investment regulations, etc in Patna real estate sector. Otherwise even more slums will mushroom up, dragging down the productivity and economic growth of Patna. The city needs to grow horizontally as well as vertically and bring the peripheral areas closer through multiple alternatives of good and fast connectivity and strengthening of physical and social infrastructure.

 

Since around 95% of the housing shortage in Patna urban areas emanates from the EWS and LIG categories, alternative methods of providing a home to them need to be implemented. Most developed countries have rental housing in place to cater to the needs to these segments. In Patna too, participation of innovative public housing structures are required for eliminating slums and providing respectable living for all; so the Bihar government has a critical role to play in development of live-able, inclusive Patna.

 

Owning a house is also the most important form of financial security for most Patnaites and Biharis. A residential property in Patna usually appreciates handsomely over time, beating the inflation rate significantly and it can be used to derive value through selling or by mortgaging to meet various personal needs. Consequently, we see most families in Bihar toil all through their lives to own their dream homes in Patna. However, given the increase in incomes, especially double incomes in families in Patna, and the explosive growth in middle class population in Patna that is also recording increasing number of nuclear families, the demand for housing in Patna is increasing unbridled.

 

The growth of the housing sector in Patna has a multiplier effect on the Bihar economy and has been a big driver of economic growth of state. The housing sector in Patna generates direct mass employment for unskilled, semi-skilled and skilled laborers as well as many white collared workers; indirectly however, many more jobs are created. Housing is second largest employment generating sector after agriculture in Bihar, which drives the labour market and a host of vocational activities and livelihoods are dependent on this sector for socio-economic development. The growth and development of the housing sector in Patna plays a major role in attracting substantial investments from both public and private sectors.

 

The state of the housing sector in Patna is co-related with infrastructural development and development of new industrial areas, SEZs and new business districts in Patna. Growing presence of new industrial and commercial hubs is an important indicator of the changing landscape. Large Township projects in suburbs of Patna will change the skyline of Patna and will lead to many housing projects in Patna, including large integrated townships being launched nearby Patna.

 

The domino effect of the housing sector in Patna is far reaching through direct, indirect as well as induced effects on the state’s domestic production, consumption, employment and revenues. Further, the close interrelationship existing between the housing sector and the well being of a nation were brought to the fore by the bursting of the U.S.A.’s housing bubble, which kicked off a deep recession in all parts of the world as well.

In the recent years, we have seen Public Private Partnership (PPP) models being introduced for large scale developments. However, developers in Patna face major constraints in financing housing projects in Patna despite the huge demand-supply gap and the sector cannot be developed through domestic Government and private sector funding alone. The steps taken by the state government are not enough for the growth and development of the real estate sector in Patna, the quick transformation of which is imperative for local and regional economic development as its impacts are manifold.

 

The advancement of the real estate sector in Patna will have direct and indirect bearing on Bihar’s economic growth, employment and other industries and sectors, so it is imperative that the Government fast tracks the pending / on-going policies and regulations. The housing sector in Patna holds tremendous potential to have a positive impact on the economic and social development of the state. A number of incentives such as subsidized land, higher Floor Space Index, timely approvals, concessions and tax exemptions, funding to name a few are necessary to aid development of housing projects in Patna. The rise in population and migration from rural to urban areas has led to pressure on infrastructure and increasing costs coupled with the unavailability of requisite units has made housing inaccessible to lower strata of population in Patna. Therefore, it is imperative that the state Government adopts successful strategies from developed and developing nations to reduce this shortage and ensure that the basic need is satisfied.

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