Perils of PRICE CUT. Panacea Worst Than Malady.

As shouts for Price Cut - from '20% Reduction' to sell on 'No Profit No Loss Basis' - grew shriller, a pall of gloom descended on the industry. Because the loudest calls came from the tallest figures of India. Media did the rest.

Some ‘Lobonomics’ before the serious topic.

"Price Is Sensitive. Not Humans."

"Price Elastic. Pockets inelastic."

"Let Market Forces Decide Price Before Market Forces You To Decide."

And, "The Most Selling Product Has No Price. FREE."

We have an extraordinary situation where we see sudden spurt in raw material prices - e.g. cement prices by 30% - pushing the construction cost steeply upwards. At the same time salary of Home Buyer crashed by upto 50%. Even the famed economist Sir Robert Giffen would have struggled to explain this phenomenon!

Call it fad, Price Cut is the most suggested remedy by experts during slow down. But it is 'Poor Economics' and certainly not 'Sanjeevani' for all ailments. It has perils, pitfalls and consequences for all.

EXISTING CUSTOMER:

The customer who bought prior to Price Cut, will live with the embarrassment of being a foolish neighbour to someone who bought after Price Cut. And bitterness will last for life.

Existing customer's 'Loan To Value Ratio' (LTV) will fall and the Home Loan Lender will ask for additional margin money or pre-pay a part of loan. This will compound the woes of customer who is already smarting from salary cut.

Existing customer would have already paid higher stamp duty, GST, and other statutory levies on the higher price.

Because the existing customer bought earlier, he would have paid Pre-EMI interest to Home Loan Lender which is in addition to the higher price.

The existing customer will be hurt to see the new customer who buys at an Advanced Stage of construction at Lesser Price while he bought at Higher Price when the project was at its Nascent Stage.

Worst, if the customer cancels transaction, his long journey for refund will begin, given the financial condition of the builder. The loss of interest paid to Home Loan Lender, Stamp duty Charges and lengthy documentation will be like salt on his wounds.

Ethically, Price Cut will be grave economic injustice to the existing customer, causing him pain and anguish.

NEW CUSTOMER:

Proponents of Price Cut will not know that the pleasure of owning a home at lower price, comes at a cost. Builder is going through the ordeal of series of shocks which has already put his business in distress. He is left with no choice but to re-work on the specifications of amenities, especially inside the homes. Builder is within his rights to do so. New customer’s joy of paying the lower price will be short lived and will be overtaken by regret and embarrassment.

Builder will resort to PLC (preferred location cost) pricing and offer the less preferred location homes at lower price and better location homes at regular price. After all, survival of builder is as important as completion of project.

Lower price will be a stumbling block while re-selling in the future. Customer may not get better re-sale price as the prospective buyer will know his lower purchase price and accordingly make a lower offer. Even if he gets better price, he will pay higher capital gains tax on the higher profits due to lower purchase price.

BUILDER:

Demonetization, GST, RERA and now Price Cut? It will be like switching off the ventilator when the patient was still breathing.

The pandemic has left a devastating impact on the builder who is dependent on the supply of 270 plus types of raw materials from as many sources. Suppliers have already started hiking the prices, to make up for the losses incurred during lockdown.

Migrant labours will not return soon and labour cost, which constitutes a major component of the project, has already shot up.

Business is standstill but the interest meter is ticking like a time bomb. Cash flow has stopped but overheads continue. A Price Cut at this stage will be final blow to the already bleeding builder who might sell fast at lower price but will not be able to complete the project due to insufficient cash flow. The customer will end up buying a home that was never to be ready for occupation.

Price cut will open the floodgates of cancellations by the Home Buyers who booked at higher prices. There will be pressure on builder for refunds and this will result in complete breakdown. Neither the customer will get his money soon nor the project will complete in time.

Price Cut in a ready project is suicidal as the builder has not only incurred all the costs but also sold stock. He needs to keep his existing customers happy to avoid cancellations and protect goodwill. At the same time he has to sell the remaining stock to cover all the costs incurred including interest costs and repayment of principal.

BANKS:

Price Cut will result in lower book size of Home Loan Lenders which will affect their ability to raise funds.

Price Cut will result in non-compliance of LTV norms for the home loans given for homes bought at higher prices.

Price Cut will reduce the cover of collateral for the construction finance availed by the builder.

It is surprising that the Price Cut calls are coming from banking sector despite knowing the pitfalls for them.

GOVERNMENT:

Price Cut will result in lower stamp duty collection which will hurt the state exchequer which in turn will impact the economy. The State will promptly revise upwards the rate of Stamp to make up for the loss.

Price cut will also result in lower GST collection and government will increase the rate of GST.

Therefore, in these circumstances, Price Cut prescribed as Panacea Is Worst Than Malady.

In other words, Cure Is Worse Than The Disease.