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Why property prices rise and fall?

Why property prices rise and fall?

Rise and fall of property price is the talk of every town. Generally property price rise is hailed as good and property price fall is considered as bad. But on other hand, property rise makes it difficult for masses to buy homes and fall in prices make homes affordable for general public. The most important thing in this discussion is that what are the factors that increase or decrease the property prices?

Reasons of property price rise and fall

Property demand vs property stock

Property prices largely depend on fundamental called as demand and supply. When there are less properties and high demand, property prices rise. But on the other hand, when there are more properties and low demand, then property prices fall.

Investment in real estate sector

Volume of investment also impacts on the prices of property. Large investments increase the property demand and prices increase. Whereas low investments decrease the property demand and prices decrease. So, volume of investment in reality sector is good indication of rise and fall of property prices.

Interest rate

Interest rates have great impact on property prices. When interest rates are low, people get small profits on deposits and invest in property sector and vice versa. So when interest rates are low property prices rise and when interest rates are high property prices fall.

Current situation of Pakistan Property Market

Everyone knows that property prices are falling in Pakistan. Interest rates are low. But on the other hand investment in Pakistan reality sector is decreasing day by day. At the same time there are more properties in market than the buyers.

As government is offering amnesty scheme for reality sector, property prices will take nose dive. Firstly because there will be more properties in the market and secondly because of capital flight from reality sector. Capital flight from property sector is due to low profit margins as compared to past trends.

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Taxes to be paid by property buyer and seller

(21) Comments

  1. Does any one here knows that not only Pakistani but all Asian properties in the past have been selling as if these were made of solid gold. The cheapest properties in the world are in USA. Even in the most popular cities like San Francisco In the coastal parts of Florida you can buy one acre (160 marlas) RIGHT ON THE OCEAN lot for only less than 0ne million dollars.In central Florida
    you can buy one acre lots for 10,000 to 100,000 dollars.This is the math in the most politically stable country in the whole world.No wonder the chines buyers are buying American properties like there is no end to it. No pollution , best roads , hospitals , schools and colleges etc etc in the world.
    Only reason Asian properties sky rockets was because of drug money , other il legit money.After all when you get a bribe it is free money , it is money you never had to earn by working hard so you buy property with it at whatever price
    Can anyone compare the quality of life in USA with that of in third world countries ?

    Reply
    • Raja
      Beautiful analysis
      Why USA properties / houses are affordable?
      Answer
      1- Low population density on 35 people living per sq kms. 400 in India 250 In Pakistan (USA has vast land)
      2- People cannot horde money in USA by illegal means. No buying of property with black money

      In Pakistan
      case is reverse
      Black money in reality sector

      Reply
  2. Hasan

    on   said 

    There are many diverse angles from which current market could be viewed. In some, there’s an element of prediction about future e.g. ‘market looks likely to gain traction in next quarter’. It may also be viewed in context of past and present i.e. analyzing what has already happened. In our particular landscape, there are always diverse opinions about even the past & present, let alone the future which is yet unwritten.

    A bit of inspiration won’t hurt. There are some global real estate consultants that map property markets & issue reports. They are doing a stellar job in India. In time they’ll come to Pakistani market as well. For now let’s borrow one of their famous metrics: Quarters to Sell (QTS). They derive it in following manner:

    Quarters to sell unsold inventory (QTS) is the years number of quarters required to exhaust the existing unsold inventory in market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter. A lower QTS indicates a healthier market.

    For our purposes – since there are no public statistics available – we’ll use personal observation of the recent past, mix it with the present, and sprinkle a little bit of crystal ball gazing into the future.

    Let’s take premium residential apartment complexes in Karachi’s Bathisland that have a ticket size of Rs. 2.5 crores or higher. I have written about it a couple of months ago; this time let’s view it from a QTS lens. We’re not actually going to be doing a division as per standard QTS formula, or base analysis on first-stage, never-sold-before units; will instead modify & use it in our own simple manner. In fact, one may think of my amended Quarters to Sell (QTS) as Quarters to Occupy (QTO).

    In the past (before 2013) when a high-end residential complex was completed and ready for occupation it used to take less than a year for all (or nearly all) units to be sold. So 6-8 months post completion (or QTS = 2 – 3) was perhaps normal for a builder to recoup his investment. Since prices used to be under Rs. 2 crores / unit, genuine end user + black money or mixed, would buy those units. You would see signs of occupation in balconies, ACs installed, number of vehicles, general activity in and around a particular building.

    All was well; at least it was reasonably OK.

    To have an idea of neighboring country, QTS for their top cities currently ranges from 7 – 17 but it used to be significantly lower some years ago. So our (simplified) QTS of around 2 – 3 as in above paragraph was likely comparable to their QTS numbers as they would have existed before 2013.

    Now almost 4 years have waltzed by since Jan. 2013.

    During this time, prices shot up in premium segment driven mostly by black money + others who had to stretch further to anchor on to a property. Prices kept rising and legit money was increasingly elbowed out. Now it was mostly one ‘investor’ first buying and then re-selling to another ‘investor’. No end user in sight.

    Here’s my opinion of how white money versus black money ratio has changed over time:

    Before 2013 –> 70% legit money and perhaps 30% black money (i.e. white collar educated professionals were still able to stretch and buy properties)

    After 2013 –> 85% black money and perhaps only 15% legit money (i.e. mostly money laundering by tax evaders / corrupt people became the norm + broker cum investors cashing in on game)

    Situation was not sustainable. Speculators, black money, agent-investors are all part of the market but the bedrock has to be genuine buyer. Without him in picture, there would be ghost-apartments with no one (end user) living in them. That is actually the case now.

    Coming back to Quarters to Sell (QTS). Since late 2012 there arose over two dozen premium high rise residential apartment complexes in Bathisland (i.e. apartments just completed & ready for occupation). Given the earlier assumed ratio of black money : white money and the quarters it used to take for a building to look ‘alive’ …..those complexes should have been fully or nearly occupied in about 2 – 3 quarters or well within 2013, at most by early part of 2014.

    However, almost all those buildings are almost entirely vacant after a lapse of even 15-16 quarters counting from their completion. And at present rate, it’s going to take at least until 2019-20 for full occupation … if at all it happens at current prices.

    To put it mildly, that’s an epic disaster. Think Bruce Willis’ 1998 hit movie: Armageddon.

    Imagine a ‘good’ market of QTS at 2 – 3 and now QTS is at 16 on way to becoming a QTS of 24 – 25. In other words, for a high end building in Bathisland that was completed circa 2012-13, it could take 6 – 7 years for it to become occupied …instead of less than a year. And that is, if no new buildings are constructed at all …then it’s going to take 6 – 7 years for existing buildings (taken as a whole in Bathisland) to appear fully occupied!

    Quarters to Sell before 2013 –> ~ 2-3 (less than a year)
    Quarters to Sell Now –> ~ 16 (4 years)
    Quarters to Sell in 2019 –> ~ 25 expected (6+ years)

    Barring very few, most builders / Investors would not be able to wait thrice as long for recovery of their investment. Yet, we cannot allow black money to hijack market again. Something’s got to give. And it has. Prices have stopped rising for some time now.

    Along come our evergreen brokers telling us that it’s not unsold inventory; it’s all been taken up by investors. Well, that investor thing was always part of the picture and yet completed apartments still used to look alive (occupied) within a year …and even if we wildly stretch things, then let’s say 2 years. As pointed out earlier: it’s been almost 4 years now.

    What happened?

    There’s a shift. This particular market appears to be in process of changing from being investor-centric to end-user friendly and those too with mostly legitimate sources of income. Well then, that’ll obviously take a while wherein prices continue their gentle slide down to meet white money way down below or hold position while white money laboriously & painfully moves up. This process could take years.

    Of course, slide is more visible (quicker) in some places than in others (open land versus constructed areas). Here’s an example: My aunt’s friend just sold her 1000 square yards plot in DHA – Karachi’s Phase 8 for Rs. 4 crore. Some time back that same friend was not willing to sell it even at a much higher price.

    A similar story is depicted via another metric called Absorption Rate. Let’s say a clutch of buildings taken together have about 1000 units to sell. If 200 apartments are sold per month, then all units would be sold off in 5 months. That translates into a monthly absorption rate of 20%.

    Higher the absorption rate (per month), better the market is from seller’s point of view. A 20% absorption rate is considered good for seller. On the flip side, a low rate indicates a Buyer’s market (i.e. it takes longer to sell off units).

    Now let’s see how the high end Bathisland market is doing. Seeing that those buildings appear to have a current Quarters to Sell (QTS) of about 16, that means 16 quarters x 3 months = 48 months. If there happen to be 1000 units to sell off, and it’s taking 48 months to do so, then absorption rate is only 2.1%!

    Hence, a Low Absorption Rate and High QTS both depict a market that is very, very bad.

    For Good / OK Market–> Absorption Rate = 20%
    Current High End Bathisland Market –> Absorption Rate = 2%

    Basically this is stalemate i.e. market hardly moving at all. All genuine and black money investors must have stopped selling / reselling to each other, realizing that:

    • Laws are becoming strict so it’s difficult to sell off to the next investor. And of course sellers don’t want to sell at a loss until last possible breath
    • Next investor would refrain from buying for same reason (i.e. strict laws, fear of being caught, wonderful gains of past not likely to be there, etc)
    • Final end user is far below this game / cannot participate given lawful sources of income

    So in bits & pieces, prices are falling (starting with open land) as discovered by Aunty Jee’s friend. Her yet another friend is probably holding on but won’t be able to do so throughout 2017 and 2018 and 2019.

    For high end buildings, sellers / investors cannot reduce prices immediately beyond say, 15-20% or so. Hence, we will continue to see vacant apartments until 2019-20 ….those that were constructed back in end 2012-early 2013! That’s a very massive loss to investors; either they could book loss now or defer it further into the future …but it’s pretty much theirs to bear.

    Disclaimer: Again, I am only analyzing elements of environment as per personal observation. Could be off by a million miles with mathematical inaccuracies, wrong assumptions & what not. Not quite claiming it to be very scientific. But am I really that far off the mark? You be the objective (but still nice) judge. I agree one shouldn’t use wide brush strokes to paint entire market in one color. Low end properties elsewhere are probably still doing a brisk business, I don’t know. This write up was about high end properties – specially constructed apartment complexes – and that too bearing a generous dose of my personal biases. So no published facts or anything …just what my eyes and ears are humbly telling me.

    One thing I am certain of is this –> Bruce Willis is profusely thanking heavens he’s not a builder or investor holding property.

    Reply
    • Hasan
      Stunning, detailed analysis with on ground facts.

      PROPERTY PRICE FALL
      Prices fall in two way

      Straight property price fall

      In This case property prices fall sharply. Like if property prices were 1 crore and fall 80 Lac in 6 months. 20% decline

      Price fall observed due to stagnation / inflation

      In this case property prices have no clear fall but prices remain same / stagnant for 4 years. Inflation for 4 years is 35%. So property prices have fallen by 35% in real time.

      Very few people understand that prices in Pakistan were hijacked by BLACK MONEY

      This is not just in Pakistan but also in India and Bangladesh.
      In Pakistan, high end property market was made affordable with only black money.
      IN INDIA
      After currency crisis prices of high end properties are falling like dominoes as no more black money can be parked in reality sector of INDIA

      Property prices in India have crashed by 50% in weeks as black money is blocked
      Click on this link
      http://www.tribuneindia.com/news/chandigarh/real-estate-prices-crash-50/323419.html

      PAKISTAN PROPERTIES ARE UNAFFORDABLE

      Pakistani expatriates saw declining wages but high property prices in Pakistan
      Genuine buyers have low purchasing power.

      WHAT IS HAPPENING IN PAKISTAN REALITY MARKET
      Small or affordable properties have strong market
      High-end properties have no buyer and prices are falling.

      PAKISTAN TO WITNESS IT’S SECOND 10 YEAR CYCLE

      First property boom = 2003-2005
      Second property boom = 2013-2016
      Third property boom = 2023-2025

      Reply
  3. Faisal Hassan

    on   said 

    I still thing Tax amensty will be limited in scope and not for everyone, secondly those who want fast exit, wud have to redcue there Ask price much lower to find willing buyers….as FBR is grilling Buyers so even genuine buyers are not in mood

    Reply
    • Tax Amnesty does not mean Property owners have to sell. In the Amnesty holders of property purchased with white money will have to pay 3% tax on the FBR value and have the property “whitened”….they are Under NO COMPULSION to sell the property during the Amnesty.

      Reply
      • Andil
        True not compulsory to sell property
        But what the meaning to stay in a sector that is drowning or stagnant?
        So, ultimately people / investors will sell properties to exit reality sector
        Lets hope for the best

        Reply
  4. Saima

    on   said 

    Good blog and walid point
    Ghar47 amnesty scheme offered
    Property market is dead
    Lagta ha 1 sal se pehle ab market nahin set ho gee
    Amnesty scheme se log paisa property sector se nikal lain ge

    Reply
  5. Sameer memon

    on   said 

    Dostoo amnesty schrme
    Pata nahin kia ho ga amnesty scheme se
    Ham property dealer to koi kami nahin kar raha 3 month se
    Bas makhian marte hain
    Mere mehange plot dha karachi main korioon ke ho gayee

    Mere sath wale daftar main bhee property dealers hsin
    Woh aj shares laye hain k electrics ka
    Woh kehte hain kuch nahin bach property sector main
    Proprty investor ko 8 se 10 mahine lage ga investent dubara property main karte
    Mere boss kehta ha 2020 tak slump rahe ga property markt ka
    Woh kehte ke tax amnesty se paisa bahar le gain ge log
    Dubara property main nahin lagain ge

    Reply
    • Sameer Memon
      Its true that property prices are down everywhere
      Lets see whats the outcome and what are the final amendments.
      Personally I too don’t think prices will rise and we will see boast soon

      Reply
  6. Asaf ali sindhi

    on   said 

    Tax amnesty scheme for real estate sector

    This is the news every where in the market
    Dont know why realtors are not happy
    Some property dealers say that property market will not recover to its previos level as momentum has lost
    Lets see but everyone looks disappointed

    Reply
    • Sameer memon

      on   said 

      Yes
      Its look like another trap from goverment to skim property market
      1000s of property dealers in karachi are searching for work
      I am property agent but not happy
      Asking price 35pc kam kar ke bhee buyer nahin milta
      Fbr se log dat gayee hain
      Es main koi shak nahin ke property logoon ne kafi kalle paisoon se lee ha
      Dha karachi main high end property ka koi buyer nshin milta aj kal

      Waise tu ghar47 wale bare hr manhoos hain property market ke lye
      Jo forcast karte hain sach nikla
      Jab tax w016 aya ham dealrrs bahoot kush te
      Lakin property pricrs bahoot gir gaee hain

      Reply

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