As real estate prices show signs of a decline, we tell investors what to do

The last time we witnessed a slump in realty prices was between 1996 and 2000. Indicatively, a home that cost Rs. 1 crore at the peak of the realty boom that ended in 1995 would have been available for about Rs. 65 lakh at the bottom in 2000. Will the history of the previous bear phase repeat itself?

It is both an appetising and a scary thought, depending on which side of the fence you are. Prospective buyers may salivate, while home owners may worry about paying high EMIs on a fast depreciating asset. What will be, will be. No one has accurately predicted market movements consistently before and no one likely will. The need of the hour is to evaluate your own situation and decide how best to protect your interests.

For a prospective home buyer, a slump in prices will be good news. Bide your time, and make a move only when you find the right home, at a price that is easily affordable in uncertain times. A prerequisite is a steady income stream or enough financial savings to meet loan repayments and more. Only if you have a secure job, sounds quite like an oxymoron today, or other healthy income stream should you venture out to buy a home in a bear market. The reason: if you run into a spot on your cash flows, cashing out will be nigh impossible. On the contrary, if you can afford it, the gains on a recovery can be enormous — the realty market clocked gains of 20-30 per cent a year after the recovery gained steam around 2005.

A single home owner should just ignore the swings in the realty market. You need that roof over your head.

For those with more than one housing asset, it is a different predicament. If your assets are in prime locations, where supply is very limited, staying put through the cycle may not be a bad idea, as another asset may be tough to acquire in the future. Besides, the decline in valuations will more likely be far lower than in the general realty price index. Think of it as Sensex and mid-caps in the stock market. While stocks not in the haloed 30 (or 50 for the Nifty) are still holding their ground, the lesser ones (whose supply is high—over 5,000) have been battered down bad.

If you have invested in realty in high supply areas, you sure have to worry. Property prices will likely be hit most in such markets. There are two things you can do in such a situation. One, sell if you can, and wait for the economy to steady/bottom out before buying again; or, be prepared to wait out some years before you start to witness an appreciation in your asset value. Patience pays (See: Sensex chart, which closely mirrors trends in the realty market).

Unless we are reverting back to the Hindu rate of growth, which most of us strongly hope and believe we are not, your asset will deliver value over the long term. All you need to ensure right now is that you have the financial strength to tide over the phase. Stay grounded, don’t panic.