What defines demand in the true property market?

In the absence of scientific research and reliable data, developers have no choice but to launch projects based on their ‘gut feel’ on what may sell rather than demand on ground.

Sarika Gaur, a newly-wed corporate lawyer, was on the lookout for a compact house in Noida. But she could not find one that fit her budget or her requirement, and that too in a market where, according to estimates, there are close to one lakh unsold units.

She is not alone. Most media reports claim that there is an oversupply of housing units in the real estate market, but that is far from the truth. There’s a supply-demand mismatch situation on ground and the reason is that developers have failed to access the demand and seem to know nothing about the demography nor what the buyers’ requirements are.

Noida is home to buyers who cannot afford to buy property in Delhi or Gurugram. There is a large pool of new jobbers and newly-weds who prefer a IBHK or at best a 1.5BHK, where an additional room could be used as a guest room or a puja room. But the market is flooded with 3BHK and 4BHK units for which demand is limited.

What defines demand for the developers? It is the lack of reliable and scientific data due to which projects are often designed based on what the developer thinks will sell.

How reliable are research reports? Most consultancies project residential formats that are best for business and not what the buyers can afford. Certain markets are overheated with maximum launches and record inventory as institutional investors with deep pockets and pipeline visibility make them calculate the right Return on Investment (Ro)) at the right time in the right market. But they do little justice to the developers’ cause or the home buyers’ need for a house.

Take, for instance, a Mumbai-based developer who recently hired a research agency for data on a specific micro market before the launch of a project. Not convinced with the report and the competitors’ launch price, he commissioned another agency to execute a similar report. Both proved inaccurate.

The experience of this Mumbai developer clearly indicates that in the absence of scientific research and reliable data, the developers have no choice but to launch projects based on their ‘gut feel’ of what may sell rather than the ground reality.

The main determinant of housing demand is demography. Other factors such as income, price of housing, cost and availability of credit, consumer preferences, investor preferences, price of substitutes, and price of complements, too play a role. The core demographic variables are population size and population growth: the more people in the economy, the greater the demand for housing. But this is an over-simplification. It is necessary to consider family size, the age composition of the family, the number of first and second children, net migration (immigration minus emigration), non-family household formation, the number of double-family households, death rates, divorce rates, and marriages.

But can there be an oversupply of a largely under-supplied product like housing?

Scientific and objective research is missing from the real estate landscape. Today, instead of the market defining demand, it is the competition, or rather the rat race, that is defining demand.

In some locations, appreciation potential is huge, and so is the housing shortage, but most launches take place in oversupplied and saturated markets.

To sum up, the broad indicators that define demand include local population, expat population, median age, number of married families, senior population, average income of households, percentage of homes on rent, number of vacant units, and social and physical infrastructure in the area, among others.