It’s greatest to keep away from properties below development

In a current analysis be aware, ICICI Securities identified that house costs had risen by round 7% between December 2021 and December 2022, after remaining stagnant from 2017-18 to 2021-22. Along with this, house mortgage rates of interest have risen from round 6.5% from a yr again to round 9% now. One yr again, the equated month-to-month installment (EMI ) on a house mortgage of ₹60 lakh—to be repaid over 20 years—would have labored out to ₹44,734. Now it really works out to ₹53,984, which is greater than a fifth increased. The level being that it has grow to be costlier to purchase a house than it was a yr again. This has led to actual property brokers hawking pre-construction and under-construction properties way more than they did up to now. I say this from the restricted proof of seeing a number of Instagram reels made by such brokers.

These brokers are very persuasive and largely provide two causes for getting pre-construction and under-construction property. First, that they’re cheaper. Second, you’ve gotten extra decisions. The incontrovertible fact that they’re cheaper is true. But whether or not they provide extra alternative is extremely debatable provided that scores of buyers have purchased and locked up properties through the years. Many of those properties can be found on the market on the proper value.

Further, there are dangers that these brokers conveniently don’t discuss. But earlier than we get to that, let’s discuss a analysis paper titled The Market for Lemons printed in 1970 and written by George Akerlof. In the US, a automobile which has defects is known as a lemon.

Now, as Akerlof wrote within the paper: “There are new vehicles and used vehicles. There are good vehicles and dangerous vehicles. A brand new automobile could also be a very good automobile or a lemon, and naturally, the identical is true of used vehicles [or as we call them in India, second-hand cars].”

Unless, the prospective buyer is an expert when it comes to the mechanics of a car, he or she faces a huge information asymmetry during the process of buying a second-hand car. They don’t know how good or bad the car really is. On the other hand, the seller does, and that’s why there is an information asymmetry.

Such a market never really works well. As Nate Silver writes in The Signal and the Noise –The Art and the Science of Prediction: “In a market plagued by asymmetries of information, the quality of goods will decrease and the market will be dominated by crooked sellers and gullible and desperate buyers.”

This occurs as a result of the vendor of a very good second-hand automobile can’t show that the automobile is nice and, therefore, doesn’t get what she or he thinks is the proper value. In this situation, such sellers are prone to preserve the automobile and the vehicles in the end obtainable available in the market on the market are principally lemons. Given this, it’s very troublesome for a potential purchaser to purchase a second-hand automobile.

So, what has this received to do with under-construction or pre-construction properties being offered? The data asymmetry that prevails in the case of shopping for a second hand automobile additionally prevails in the case of shopping for an under-construction or a pre-construction house.

It’s very troublesome for the customer to know whether or not the builder will get round to delivering the venture on time.

Between 2002 and 2013, when actual property costs rose at a quick tempo, many builders merely didn’t ship on time. This led to a state of affairs the place the consumers needed to proceed paying lease together with repaying the house mortgage.

Some builders simply took the cash and disappeared. Now, in 2023, with actual property regulators round, the state of affairs is a bit higher. Nonetheless, actual property regulators are nonetheless work in progress and the standard of the regulators additionally varies from state to state.

Further, many tasks now include a supply date of 2027 and 2028. Four years or 5 years is a very long time and rather a lot can change throughout that interval. Also, even when the builder delivers on time, you run the chance of the ultimate flat not being just like what was promised. What you see is just not what you might get. Of course, one can take this up with a regulator, however then that can take time, cash and psychological house, stuff which is often in short-supply.

So, ought to one actually tackle the chance of shopping for an under-construction or pre-construction property? Or does it merely make extra sense to purchase a ready-to-move flat, albeit barely smaller or barely away from town? While the selection is clearly yours pricey reader, you now know the dangers concerned.

Vivek Kaul is the creator of Bad Money.

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