REAL ESTATE PRICES IN PUNE – HYPE AND REALITY
THE MYSTERY OF INVENTORY OVERHANG
MUSINGS OF A NOVICE SELF-STYLED PROPERTY GURU Part 2
By
VIKRAM KARVE
Continued from Part 1…
MUSINGS OF A NOVICE SELF-STYLED PROPERTY GURU Part 1
If you want to, do read Part 1, but remember to come back here and read Part 2, or you can always read Part 1 after you have read Part 2 - so read on ...
THE MYSTERY OF INVENTORY OVERHANG
Before I delve into mystery of INVENTORY OVERHANG let me tell you a Mulla Nasrudin story called THE CAT AND THE KABABS
One day the gourmet Mulla Nasrudin bought five kilos of the tastiest kababs from the best restaurant in town to enjoy with his friends in the evening party he had organized for his closest friends.
He gave them to his wife with explicit instructions in how to serve them in the evening party and went out for a walk.
Mulla Nasrudin’s wife garnished the kababs and kept them in serving plates on the dining table.
Suddenly, her sister and her kids arrived unexpectedly.
Mulla Nasrudin’s wife’s noticed that her sister and her kids were staring at the mouth-watering kababs in hungry anticipation, so the wife asked her sister and her kids if they would like to taste a kabab.
“Yes,” they all said and so the wife, her sister and her kids tasted a kabab each.
The melt-in-the-mouth kababs were so delicious and tasty that they could not resist the temptation to eat a few more.
They loved the kababs so much that, while gossiping, they unconsciously kept popping the kababs into their mouths, till suddenly all the kababs were finished.
Then the wife’s sister and her kids said goodbye and left.
Mulla Nasrudin’s wife realized that the kababs were finished.
To salvage the situation Mulla Nasrudin’s wife quickly prepared pakoras to be served in lie of the kababs.
When Mulla Nasrudin’s friends arrived they were served pakoras instead of kababs.
After his friends had left, a furious Nasrudin demanded an explanation from his wife about why kababs were not served.
His wife meekly said that the pet cat ate up all the kababs.
“There were 5 kilos of kababs. Don’t tell me the cat ate up the full 5 kilos of kababs,” Nasrudin shouted.
“Yes. Your cat ate all the kababs - the full 5 kilos. Why don’t you ask your darling cat instead of scolding me?” his wife said.
Mulla Nasrudin caught hold of his cat and put the cat on the weighing scale.
The cat weighed exactly 5 kilos.
Nasrudin looked at his wife and said, “The cat weighs 5 kilos and the kababs were 5 kilos.”
Nasrudin’s wife said, “So?”
Now, tell me my dear wife,” Nasrudin asked, pointing to the cat sitting on the weighing scale:
“If this is the cat then where are the kababs?
On the contrary if these are the kababs then where is the cat?”
ARE PROPERTY RATES GOING TO RISE or FALL IN WAKAD PUNE ?
Please keep this story in the back of your mind while we discuss the impact of inventory overhang on real estate prices, especially in Wakad Pune.
In real estate the only factor which determines property prices is the DEMAND versus SUPPLY Equation.
Thus, if you want to estimate whether the real estate rates are going to rise or fall you must have some idea of the Demand – Supply situation in the location where you want to invest in property.
But how do you do it?
Well, one quantitative measure of the Demand versus Supply Equation is a term called INVENTORY OVERHANG.
Inventory Overhang is the number of months it will take for all the unsold supply of units in the market to be sold out at the current sales velocity (rate at which housing units are being sold).
To give you an example, say in the location of Wakad, there are 1000 apartments available for booking in launched, ongoing and completed housing projects and say about 50 apartments are beings sold per month (sales velocity=50) then the inventory overhang will be 1000/50 = 20 months. Thus, we can reasonably forecast that it will take 20 months for the unsold supply of units in Wakad to be sold out at the current rate at which units are being sold (sales velocity).
However, it is not so simple, since both the supply and demand are variables and the number of unsold units will keep fluctuating depending on increase in supply as new projects are launched and also increase or decrease in sales velocity.
Price Appreciation is inversely proportional to Inventory Overhang.
The lower the inventory overhang the faster and higher the prices of property are going to rise and the higher the inventory overhang the slower the property rates are going to rise.
In fact, if the inventory overhang exceeds the “safe” limit (20 months or so) then property rates are likely to fall.
So if you are an investor you better estimate the inventory overhang before you invest in property at a certain location.
But does all this theory work in actual practice?
Let’s take a hypothetical example of Wakad in Pune where I live.
Now Wakad is a huge spread out place. In Wakad, the general infrastructure is very poor and the Social Infrastructure is almost non-existent. The current property rate in Wakad is certainly not commensurate with the infrastructure and amenities.
If you walk around the fast emerging concrete jungle proliferating all over the place, you will realise that there is probably a huge oversupply of residential apartments, due to a large number of ongoing realty projects, and, if you ask around, it seems that hardly anyone seems to be buying flats.
This means that in Wakad Pune the inventory overhang is quite large.
Is the inventory overhang 20 months, 24 months or even more? I will not risk even a rough guesstimate since, as a layman, I do not have any authentic data. That is the real problem for a layman – it is difficult to get credible data regarding supply and demand (in view of the opaque nature of the realty sector). Whereas the likely availability of units may be relatively easy to compute based on the data given by developers in their brochures and advertisements, it may not be possible to accurately compute the sales velocity since developers may like to be discreet about actual sales.
Of course, if you are really interested, one way to get reliable data is to go to the municipal authorities and find out (by RTI or otherwise) the number of property sales registered and the dates from which property tax is being levied. But doing all this may be quite difficult for the layman. So the inventory overhang you compute is at best a guesstimate.
Now, as I said, by sheer observation it appears that the inventory overhang in Wakad is quite large. Also, as supply keeps on increasing due to new launches of residential projects, which happens almost every day, the inventory overhang will grow even larger and larger by the day.
This means that hypothetically, at least in Wakad, the property prices are certainly not going to appreciate very much. Theoretically speaking, property rates in Wakad may even decline in the near future like they did a few years ago, in 2009 I think.
The inventory overhang keeps rising, the number of unsold flats keeps increasing, but despite this, the property prices, actually keep rising, instead of falling. It seems that the inventory overhang theory is turned topsy-turvy.
Intriguing, isn’t it? How can this happen? Are there any hidden factors? Or is it all hype? Or is it a case of artificial demand being created? Will this realty “bubble” ever burst?
Well, I can only comment that IN REALTY HYPE MATTERS MORE THAN REALITY.
Why doesn’t the theory of Inventory Overhang work in practice?
Is this strange phenomenon of high prices despite oversupply happening only in Pune or is it a common occurrence everywhere?
You tell me.
Can you solve this mystery?
Well, you figure it out.
Maybe the answer to this paradox lies in the Mulla Nasrudin Story I told you earlier –The Cat and The Kababs
Till next time, Happy House Hunting
To be continued in MUSINGS OF A NOVICE SELF-STYLED PROPERTY GURU Part 3 ...
VIKRAM KARVE
Copyright © Vikram Karve 2012
Vikram Karve has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as the author of this work.
© vikram karve., all rights reserved.
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About Vikram Karve
A creative person with a zest for life, Vikram Karve is a retired Naval Officer turned full time writer. Educated at IIT Delhi, ITBHU Varanasi, The Lawrence School Lovedale and Bishops School Pune, Vikram has published two books: COCKTAIL a collection of fiction short stories about relationships (2011) and APPETITE FOR A STROLL a book of Foodie Adventures (2008) and is currently working on his novel and a book of vignettes and short fiction. An avid blogger, he has written a number of fiction short stories, creative non-fiction articles on a variety of topics including food, travel, philosophy, academics, technology, management, health, pet parenting, teaching stories and self help in magazines and published a large number of professional research papers in journals and edited in-house journals for many years, before the advent of blogging. Vikram has taught at a University as a Professor for almost 15 years and now teaches as a visiting faculty and devotes most of his time to creative writing. Vikram lives in Pune India with his family and muse - his pet dog Sherry with whom he takes long walks thinking creative thoughts.
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