Is the property market headed for a hard landing?

In 1959, Charles E Lindblom, the American political scientist, published a paper in the Public Administration Review - The Science of 'Muddling Through'. In this, he contrasted what he called the 'root method' of decision-making with the 'branch approach'.

The root method involves comprehensive evaluation of options in the light of defined objectives; whereas the branch method involves building up, step-by-step and by small degrees, from the current situation. Lindblom claimed that the root method was, in fact, not usable for complex policy questions. His verdict was that the practical individual must follow the branch approach - applying the science of muddling through.

The residential property market in India, particularly in the Tier I cities, has remained sluggish for the past 12 months, with significantly lower sale volumes when compared to the high absorption rates of 2010. Home loan interest rates now seem to be at their cyclical highs (but should soon decline) and unforeseen tax levies have come at a time when the industry is facing its moment of reckoning.

In these uncertain times, the question arises whether strategic decision-making for residential property developers to improve sales should follow the root method - a comprehensive evaluation of options, or the branch approach - a process of muddling through. In a multiple stakeholder environment with several large uncertainty input parameters, the branch approach seems to be the instrument of choice.

In adverse market conditions, developers want to ascertain facts on some key issues. They consider whether they should:

Lower prices in on-going projects

Proceed with construction

Launch new projects at lower prices

Sell non-performing assets such as land

THE 'LOGIC' OF RESIDENTIAL PROPERTY PRICING

While others require comprehensive evaluation, determining residential property prices usually entails a trial-and-error approach. During good times, prices are invented. When the going gets tough, prices are discovered (hence the term 'price discovery'). Developers continually assess the market with trial price levels to increase sales in on-going projects. To avoid adversely signaling the market (which could lead to a downward spiral) prices in on-going projects are kept 'sticky-upward'.

In the first phase, negotiations are held behind closed doors to test the market's appetite. If sales do not recover, discounts are offered up-front on the table. If there is still no perceived recovery, discounts are advertised to increase visitors to the sales office. At this stage, the market is said to have witnessed a correction. This is fundamentally a process of 'muddling through', in which residential prices offered by developers in on-going projects rise like rockets but fall like feathers.


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