Can reducing house prices lead to higher demand in realty market?

Home buyers

Do you like discounts? When visiting a shopping centre, do you choose the things which offer a discount on the ones that don’t? It’s common for us humans to be more attracted towards the items/products which offer discounts, be it electronic goods or fast-moving consumer goods, the demand is always inversely proportional to price. Lower prices coupled with good branding increase affordability of consumption items, thereby expanding the market.

However, the scenario is more complex in case of homes, as the situation incorporates both the consumption as well as investment demand in the real estate sector. For example, in a falling market, a house constructed at the cost of over Rs. 50 lakh/- would not get an appropriate amount from the buyers. In such cases, buyers often see value in buying the property, given the number of options available.

Whenever the prices of homes fall, homebuyers usually get lower realization for their old homes. In such a scenario, home buyers lower their budget, impacting the overall demand for the new apartments as well.  This is in complete contrast to the fast-moving consumer goods, as lower prices in the real estate sector mean lower demand.

This is a complex cycle in the real estate segment as generating a demand curve for homes is principally a difficult job. Coupled with inefficiencies and faulty work culture in the real estate sector, this further increases the complexity involved. Therefore, breaking the myth is important, as lowering home prices would never lead to higher demand in the market.

Economic principles such as inflation, deflation, which are applied by the RBI after due analysis of the market do not apply to the real estate sector. Hence, lowering prices doesn’t expand the market, as one would normally expect.

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