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Why apartment prices need to fall further

  • Published at 06:50 pm June 16th, 2017
  • Last updated at 07:01 pm June 16th, 2017
Why apartment prices need to fall further
Though the real estate sector has experienced what economists label a ‘price correction’, experts say the prices of apartments need to come down further for to it recover from sluggish sales. However, with the introduction of the new flat 15% VAT on all sectors in the proposed budget this fiscal 2017-18, industry insiders fear the sector will continue to totter. Not only will the VAT affect the sale of apartments, but it will also hike up the price of building materials including rod, cement etc. Since 2012, the sector has been on a downward spiral. According to a survey of the Real Estate and Housing Association of Bangladesh (REHAB) accounting for 209 companies in 2014, 12,185 flats worth Tk8,811.19 crore had remained unsold. Annual sales fell to 1,749 flats in 2014 from 1,965 in the previous year. The realtor platform claim that the number of unsold flats still remain above 10,000. A large reason for the drop in sales in recent years was that prices had remained artificially high in the decade and half before that because of the unregulated use of ‘black money’. [caption id="attachment_69615" align="aligncenter" width="900"]20170504-Mehedi-Hasan00011 A signboard saying ‘Flat for sale’ hangs on the boundary wall of a residential building on Nazimuddin Road, Old Dhaka. Ads like this one are a common sight in Dhaka these days. The photo was taken recently Mehedi Hasan[/caption] The crash in stock market, stricter bank loan regulations and strong monitoring of the sources of black money have played a major part in slowing down the sector. Trade analysts say oversupply, political unrest, fall in remittance flow, and a dull stock market has also played a role in the sluggish growth. Economists say for apartments to come within the reach of tax-paying citizens of the country, prices would have to come down further as they are still irrationally higher compared to other indicators of the economy. According to a rough estimate of industry insider, on average prices of flats have seen 25% to 30% fall in the last couple of years after the bubble burst in 2012. Besides, initial signing of deals for purchase of flats has declined by over 50%. “The apartment prices fell 25% to 30% over the last couple of years from its peak in 2011-12”, Dr Toufiq M Seraj, the managing director of Sheltech (Pvt) Ltd, told the Dhaka Tribune. Capture An average apartment in Dhanmondi, which was selling at Tk16,000 per square feet about six years ago (2011), is now available at Tk 13,000 (2017), Dr Seraj said. Similarly, the average prices of flats in Baridhara have dropped as low as Tk 18,000 per square feet from its peak of Tk 23,000 five years ago. The prices have also dropped in other areas including Gulshan, Banani, Mirpur and Uttara. Despite the price correction, the dream of owning a flat for a middle income or lower middle income family still remains out of reach. “Realtors made inconsiderable investment hoping for higher growth in future, which caused excessive supply in the market,” Policy Research Institute (PRI) of Bangladesh executive director Ahsan H Mansur told the Dhaka Tribune. Later, the demand for flats fell due to the crash in stock market and stricter regulations on loans imposed by the government. As a result, the sector has seen a sharp drop in prices, bursting the bubble, said Mansur. But, it has to come down further, he added. Former finance adviser to the caretaker government ABM Mirza Azizul Islam said: “Political turmoil, unfriendly environment for investment, complexity in taking bank loans, world economic recession and a bearish share market were responsible for the downturn in real estate sector.” “A government financial package helped boost the real estate sector at the neginning. Then higher remittance inflow, bullish stock market and increased income of the people fueled the growth,” Center for Policy Dialogue (CPD) Research Director Khondaker Golam Moazzem told the Dhaka Tribune. The price correction at present is not enough to attract middle income buyers and there is scope for more correction to bring the prices within reach of people, said Moazzem. To pull the sector out of the sluggish trend, the government has to provide low cost credit support to middle income people to purchase flats, he adds. Talking on the current price of flats, REHAB president Alamgir Shamsul Alamin said price correction did not come down to a level that is affordable for middle income people. He said it could come within their reach if the government reformed registration fees and the tax structure, he added. The interest rate on housing loan has come down to a single digit, but is yet to bring the benefits to aspirant buyers of flat. This is because of a cumbersome process, unavailability of loan and unwillingness of banks to provide loans to buy flats. “Global recession, downswing in remittances, and legal complexity has adversely impacted transaction in real estate business, said Liakat Ali Bhuiyan, First Vice-President of REHAB Considering the present scenario, the government should form a fund of Tk20,000 crore to provide low cost financing to enhance loan at the individual level in bringing vibrancy in the sector, he added. The black money factor Despite the criticism surrounding the opportunity to whiten black money, REHAB wants investment of black money in the sector without questions being raised about its source. “The scope of investment of undisclosed money should be provided with a provision of not raising any questions by any of the government authorities regarding the source of income of the investor, in case of purchasing first apartment,” said Liakat Ali Bhuiyan, First Vice-President of REHAB. Dr Mansur said that “Huge black money invested in the property business was one of the reasons behind the creation of housing bubble for the last few years, and it was bound to burst sooner or later.” Seeking anonymity, an economist said that a huge amount of black money is still being pump into housing sector. He argued that prices of flat remains high and beyond the reach of people only for allowing black money in the sector. According to law, untaxed money holders can legalise the money through construction or purchase of residential buildings or apartments by paying a 10% tax. Since independence, a total of Tk13,337 crore has so far been legalised earning the government Tk1,454 crore in revenues.
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