Innovation in Internet Advertising

By: Research Factory

Abstract

The article presents the paradigm shift happening in internet advertisements from banner advertisements to more specific form of advertisements which are much more accountable for advertisers and focused towards customer. It discusses on how Google despite being the biggest disguised form of advertising agency has been constantly changing to be more cost effective for the advertisers at the same time delivering the message to the target segment. We have tried to explain the advertising costing model prevalent in the industry plus the new innovation in internet pricing, tools and advertising methods coming up. Innovations like cost per click and pay per call have lead to serious competition in the online advertising front between MSN’s Adcetre and already established Google’s Adword. The article also discusses Google’s unique Adsense concept which has given business opportunity to thousand of bloggers and non serious website owners.

Introduction

John Wanamaker the man who invented department stores and price tag in 1870 famously said “Half the money I spend on advertising is wasted, the trouble is, I don't know which half.” More than a century later the proverb still holds true and more so for the internet based advertisements. According to a Mckinsey research internet advertisements going to the wrong audience accounts for $332 billion of wasted resources of which $112 billion is spent in America alone. For any marketer this waste of resources is a night mare. In the following article we will try to look at the various tolls and technique which companies and agencies are using world wide to track their advertisement so that it reach the correct audience.

Traditional media like television commercials have come in for serious criticism in the past often relating it to as if dropping an atom bomb. The message hence sent reaches the entire population rather than small fraction of our target. Also television rating point system (TRP) used for measuring viewer ship of program does not take into account viewer’s involvement with the program. For example a person may have switched on the TV and gone in for shower or to his kitchen. Also, the viewer might have switched channel at the time of commercial break or the advertisement featuring men after shave is being watched by a women. Internet advertisements on the contrary are more specific and more narrowed down to the desired target segments. With more than 10 million program recording software like TiVO already being used, agencies are more than skeptical about the future of television commercial. More so consumers also tend to be more alert on the internet. Whereas people might watch a television show in a semi-comatose state of mind and at obtuse angles on their couches, consumers typically surf the web leaning forward while paying attention to the screen.

Internet advertisements which mainly comprises of banner ads, sponsored searches, videos and text files. Innovation is the key for internet advertisements, with advent of video ads their distinct advantage in the inability of user to avoid them plus with additions of sounds and graphics make them more appealing as compared to banner ads. However of late internet advertisements have developed a problem of their own. Often we encounter interruption by mysterious banner ad only to be taken to a site that offers us no value. Internet is more a medium of knowledge than entertainment hence any disconnect between the kind of work we are doing online and the advertisements generates negative feeling towards that advertisement and site. This is unlike in the case of TV where entertainment is the main reason for viewer ship. Advertisers therefore are looking at options which put advertisements relevant to the content of the site and add value to the site. According to Mckinsey report although the inventory of banner ads—$4 billion to $8 billion—appears more than sufficient to accommodate the likely demand of $2.5 billion, advertisers probably won't be interested in much of what's available. The complex task of spreading media spending across thousands of small Web sites, many with different ad formats, means that advertisers tend to return to heavily trafficked sites, where supply is at a premium. Even on the big portals, marketers are leery of having their ads placed near consumer-generated content that might be objectionable. In fact, advertisers currently direct 96 percent of their spending for online display ads to pages that represent just 30 percent of overall Web traffic.

Innovation in internet advertising

The above reason have lead to series of innovative steps being taken by various online advertisement companies to make cost of advertisement more accountable and driven by actual customer interaction rather than theoretical exposure of users. Advertisers now pay only for real and measurable actions by consumers, such as clicking on a web link, sharing a video, placing a call, printing a coupon or buying something. This has lead to pricing on the basis of every click that a user makes on the advertisement, also called as “Cost per click (CPC)”. New interactive forms of advertisements have replaced the traditional banner ads and lots of new innovative steps are being worked upon.

Generally CPC model of payment was preceded by cost per impression (CPM) model which still being widely used as the mode of calculating advertising rates for the internet.The CPM model refers to advertising on the basis of impression. It is used for measuring the worth and cost of a specific e-marketing campaign. This technique is applied with web banners, text links, e-mail spam, and opt-in e-mail advertising. This type of advertising arrangement closely resembles Television and Print Advertising Methods for calculating the cost of an Advertisement. Often, industry agreed approximates are used. The total price paid in a CPM deal is calculated by multiplying the CPM rate by the number of CPM units. For example, one million impressions (theoretical audience) at $15 CPM equal a $15,000 total price.

1,000,000 / 1,000 = 1,000 units
1,000 units X $15 CPM = $15,000 total price

The amount paid per impression is calculated by dividing the CPM by 1000. For example, a $15 CPM equals $.015 per impression.

The Cost per Click model was formulated by Google under the banner of Adsense and Adwords. The innovative practices being followed by Google helped it to garner a turnover of $6.1 billion last year hence making it one of the biggest disguised form of online advertising agency. Adword an online advertising tool offered by Google helps advertisers to tag searches to definite keywords which are widely used. When such a keyword is searched on Google search engine generates a set of sponsored searches along side the search result. An advertiser is then charged when such a sponsored is clicked by the user. All this comes with an added twist that advertisers could bid for these keywords in an online auction. Google also has AdSense a system that goes beyond search-results pages and places “sponsored” (ie, advertising) links on the web pages of newspapers and other publishers that sign up with Google. Like AdWords, even AdSense advertisements are “contextual”—relevant to the web page's content—and the advertiser pays for them only when a web surfer clicks. Adsense is path breaking in the respect that bloggers and people who own non commercial sites enriched with good content can make money out of this tool. A typical Adsense customer when signs up give space on his website to Google for putting up ads on his website. This ad when clicked gives the owner of the site some royalty. Google in return insures that advertisements are relevant to the content of the site by using various sophisticated tools and techniques. Various filters are used to block competitor and pornographic ads coming on ones website. This also makes process more user friendly and regulated. Google puts relevant CPC (cost-per-click) and CPM (cost per thousand impressions) ads through the same auction, and lets them compete against one another. The auction takes place instantaneously, and, when it’s over, AdSense automatically displays the text or image ad(s) that will generate the maximum revenue for a page -- and the maximum revenue for you. Google goes beyond normal advertising auction but offers tools used for designing websites in order to become more advertisers friendly. Site owners can give the URL’s of their site which Google scans and finds out all the relevant keywords present in them in order to be picked up in a search. Also the Google search bar we find in many websites is another feature of Adsense. A sponsored search result when searched through search bar is clicked; some amount of money gets paid to the owner of that website. A full vertical diversification of Google can be seen from the following case:-

I own a site and want to earn revenue from it. This is how I will go about doing it with the help of Google.

a. Once my site is completed I will submit my URL to Google for it to be included in its free searches.

b. Once the site becomes popular and I start getting few hits I run this site in Google analytics, a statistical tool used for analyzing my site on the parameters of hits depending on location, time and age of visitors. I can even find out which all portions of my site are more frequently visited and which are not.

c. The portion of sites which are less visited can be boosted by using Adword in which I buy keywords in those portions of my site which are least visited. Hence, when a next time a query for such a word is raised my website features as one of the result.

d. The most frequently visited portions of my websites can be used through Adsense for putting up ads via online auction hence adding to my revenue.

e. I can even add Google search bar for increasing my revenue besides which there are number of tools available which help me in designing better websites in order to brand it in a better way for advertisers.

The massive indents created by Google have to be countered by none other than Microsoft recently launched Adcentre. Adcentre goes a step beyond Adsense and targets customer on the basis of gender, geographic location and day part and day of week. Critics of Adcentre say how such segmentation be achieved specially when user is not disclosing any of these information online. Analyst feels this is being achieved by targeting through demographics via MSN Passport profile. So, IF a user is logged into their passport account and IF their Passport data is valid, and IF the person that is logged into the Passport account is the person who "owns" the Passport, then demo targeting is achieved. This can also be done though huge information available to MSN through licensing information of various Microsoft products plus the personalized cookie which gets updated when one travels around the web. This surely is a brilliant concept but we have to wait and see for its effectiveness.

Future Ahead

Cost per click is fast being replaced by pay per call or pay per view. EBay is coming up with pay-per-call advertising on a larger scale through its recently bought Skype (Like Gtalk) software.

Another company Kontraband track exactly how many times a video is viewed and where, so that clients can see neat pie charts that summaries their success and hence are billed accordingly.

ZiXXo, saw that almost 90% of the discount coupons issued on the net were wasted hence now lets advertisers issue coupons online and places them on search results, but charges advertisers only when a consumer prints one out. Such initiatives are breakthrough in its kind and allow the manger to mange his advertising budget in more effective and efficient manner therefore generating widespread acceptance all over.

Marketing Filters

By: Prateek Gupta, MBA II, Marketing

Abstract

The article studies the strategic shift in the modern world suggestive marketing and the use of marketing filters, a tool to market a product based on suggestions of other consumers or decision influencers, to promote the products. Suggestive marketing is occupying a key role in selling of modern products and services. The article deals with the design and implementation of filters for the assortments based products.

How many times it has happened to you that you sit in a restaurant, you find all the songs which are being played you love them. Often it happens you come across a person who has read all the books that u have. Few days ago my younger brother bought her friends’ laptop and I was using it and I was amazed to see that she shared my taste to the spirit. All her play lists were such that I took out some blank CD’s and ended up burning them. It’s quite unique that sometimes when we have to choose from a large amount of assortments we don’t know what to buy. The greater the variety more difficult is the choice. How many times have you bought a CD because you loved one song, but ended up hating the rest of the disc?

The scenario has changed to a large extent with the demands of consumers are ever changing and the consumer being more and more informed. The latest empowerment of the consumers is coming of age with the new concept called marketing filters. Basically marketing filters is a type of marketing tool where you sell individual units of a product and you select your choices of based on the choices of other people, editors, reviewers, curators, celebrities etc. These marketing filters give the consumers some permutation of relatively better choices available for the product. Especially in the case of new age marketing, the concept is what we call “Suggestive Marketing”. An unlimited number of user-defined marketing filters can be created where each of them would have a series of predetermined items that are assorted on the basis of prior inputs.

Why filters will really be successful is one of the questions which is of utmost importance to us. If we look in depth at certain aspects of the marketing filters and the consumer response to them we would find the following insights surface.

Belief in Insider Information-

Consumers instead of believing the marketers claims about the product and it’s excellence. Believe in the first hand experience of other people and they tend to trust the opinions of other people who have used the product themselves. For example if we consider Amazon.com which sells it books. It associates a huge number of consumer reviews with the books and the consumer tend to believe the reviews more than they do any other professional opinion on the books, even more than half of them are casual comments by the readers of the book. The filters employed by the amazon.com allow you to see all the books for which a customer has either written a review or has bought. So actually if you tend to agree upon with some unknown customer you can just traverse his preferred list of books.

Expert Opinion-

Marketing filters also provide customers’ an expert endorsement to directly choose from a huge range of products. Interesting implementations of these kinds of filters are visible in the organized book retail chain “Crosswords”. They have a separate section of books which are assorted from the books in their stock and kept as “Sriram Recommends”. Many customers buy books just because of the strong filter, that the books are recommended by the CEO of the bookstore himself and trust his opinion as a voracious reader. They prefer to buy books which are endorsed by an expert opinion.

As consumer options continue to increase, the filter will gain even more significance in the marketing domain. The ultimate insight would be creation of niche as narrow as an individual, then the filters would rule. For example, homogenized, stereotype models of computers are slowly being replaced by a multi-option, self customizable and convenient form. When the options grow wider, our focus naturally narrows to find the perfect fit, and marketing filters are steps ahead in the same direction. Lisa Johnson has talked about different ways these marketing filter actually be implemented in the organizations.

1. Create filters in both "practical" and "passion" categories

Progressive Insurance has made it easy to filter through the benefits of all the available insurance offers. It's a welcome solution for a boring, yet necessary purchase. On the other end of the pendulum swing, fans will spend hours and days consulting filters in their passion categories, including books, fashion, music, gaming, travel, sports, collectables and politics.

2. Build a forum for customer opinions

How can you gather and leverage customer opinion data? Think about how brands like eBay, Amazon and Epinions have made minor celebrities out of their top reviewers.

3. Develop an influential insider

Consider creating an internal brand personality who shares her favorite purchases. For example, a travel company could profile its CEO and ask her to share favorite vacation destinations, packing tips, luggage criteria and the best ways to re-book a canceled flight or avoid travel headaches.

4. Filter out the unnecessary

Sometimes, knowing what not to buy is more valuable than information on what to purchase. The trusted author of The Girlfriends' Guide to Pregnancy has released a shoppers' guide to steer new moms through the dizzying array of products available for their little ones. New moms appreciate the scoop on what's essential to buy new and what's OK to pick up used or to just forget altogether.

So now we can see that there is a way by which we can clutter through a series of assortments and offer consumer a good and interesting solution through these techniques of suggestive marketing. I have strong belief that in the era of customization and varied choices these would be the voice of the new age marketing.

Cement Industry

By - Amit Puri and Samrin Shaad

Growth and India can easily be taken for synonyms in recent times. It’s not just for the potential of IT and ITES sectors that India is considered a goldmine, but also in a lot of other sectors, the prerequisites, of course, is that investments are made in key areas which would be the drivers for future growth. The top slot for the key areas would easily be taken up by the infrastructure sector. Not only does the sector have enormous scope for growth in itself, it is an important component of the entire growth eco-system.

The cement industry would play a crucial role in building up the infrastructure required for aviation, transportation, ports, and fuel terminals (for energy requirements) amongst others.

The Cement Industry in India has made major strides ever since inception of the first cement plant in 1914 with a humble capacity of 1000 tons/annum. At 145 metric tones a year the country is the second largest producer of cement producing around 5% of the global produce.

GLOBAL SCENARIO
DemandCement demand throughout 2006 will remain strong with growth expected in most countries. There are exceptions, notably the Philippines, Malaysia, the UK, Switzerland and Germany. As expected, the emerging markets are on course to register high annual growth rates. In the Middle East, India and Vietnam, rates of 8% are on the card, while in other countries rates of 3% to 6% have already been reported.

The shift of focus
In the recent Building Materials Report from Exane BNP Paribas, there was much mention of the shift in the centre of gravity of the cement industry to the East, and from the mature markets to the emerging markets. Asia represents 70% of global cement consumption, with China accounting for about 45% of the world total; by 2020 the emerging markets are expected to represent 90% of world consumption. For the period 2005 – 2010 it is anticipated that there will be a net increase in capacity of 648 million ton stream, of which 63% will be in Asia and 15% in the Middle East, two regions in which the European players have a relatively limited presence.

Middle East
With regard to the Middle East countries, there are two important factors that could be influencing the decision makers: oil prices and the geopolitical situation in the Middle East. Construction output in these countries has always been correlated to oil process. If demand slows and does not match expectations of increased cement capacity there could be intense domestic price competition and surplus capacity would have to be exported, out of a region that is currently importing about 15% of global sea-borne cement.

The international cement groups as well as the domestic producers in the Middle East will be carefully watching oil prices, as a fall from the high levels and revenues that have been fuelling the construction industry in many parts of the region could severely affect cement demand.

Expansion optionsThere is also another interesting aspect of the latest developments in the cement industry and that is an increase in vertical integration, in which companies are looking to control downstream activities. The acquisition of aggregates companies or ready mix concrete operations (such as that of AggregateIndustries by Holcim, or RMC by Cemex) can offer a deterrent to imports. An oversupply of cement in some of the rapidly expanding regions could set off a price war in the mature markets and the established players will want to protect their domestic interests, by becoming both producer and customer.

THE INDIAN SCENERIO
The Indian cement industry is fragmented across the length and the breadth of the country with a few clusters. Cement being a transportation intensive industry the fragmentation provides an opportunity. Road is the preferred mode for transportation upto 250 km but the industry is highly dependent on the roads as the railway infrastructure is not adequate, there is an acute shortage of wagons.

Consumption
Indian per capita consumption of cement is only about a third of the world average. Even though India stands fourth in the tally of cements consumers across the globe it easily has the capability of being the second largest consumer behind China, which, as per the estimates, would continue to be the largest consumer of cement. An additional 12 million tons per annum would need to be added to the current Indian capacity to keep up with the growing demand. There aren’t a lot of Greenfield projects in the pipeline to add to the capacity thus it would create a favorable demand-supply scenario.
However, cement consumption per capita in our country at about 115-kg/ capita is one of the lowest amongst other countries. A simple comparison with the rest of the world would prove the point, the figure for China, for instance is 450 kg/capita. Similarly in Japan it is 631 kg/capita while in France it is 447 kg/capita, while the world average is about 250 kg/capita.

Energy EfficiencyAs for energy and pollution norms, the best performers in the country perform almost at par with the best around theglobe (thermal energy Kcal/kg of clinker – India 665 against 690 of Japan and pollution norms SPM of 40 in India against 20 of Japan) but the average performers lag far behind the global average.

Demand Supply
Cement demand has posted a healthy growth rate of 11.16% in the current fiscal. This is in tandem with strong economic growth of the country. The GDP growth in the current fiscal is expected to be in excess of 8.1 per cent and during the half year Jan-June 2006, cement industry grew around 12.2 % as compared to 10.5 % for the corresponding previous year.

During 2005, the industry produced and supplied over 136 million tons of cement, including export of 9 million tons of cement and clinker. The industry capacity was 157 million tons. The industry achieved production of 141.81 million tons in fiscal 2005–06 compared to 127.57 million tons during corresponding previous year.

The strong growth in the cement sector has been fuelled by various sectors which are witnessing strong growth themselves. They are:

Ø Growth in housing sector (over 30%)-a key demand driver;
Ø Infrastructure projects like ports, airports, power projects, dam & irrigation projects
Ø National Highway Development Programme
Ø Bharat Nirman Yojana for rural infrastructure
Ø Rise in industrial projects
Ø Export potential is also a demand driver

Capacity UtilizationThe capacity utilization has improvedover the years, the current level of capacity utilization is pegged at 90% which in itself is a benchmark the world over. Not being able to add capacity rapidly has been a blessing in disguise for the industry as it has enabled it to attain such a high level of productivity.

THE CONSOLIDATION
In the past 3 years the Indian cement industry has undergone dramatic changes, the takeover of L&T cement division (UltraTech) by Grasim (Aditya Birla Group) was only the beginning of the consolidation that was to follow. The top five players control almost 50% of the capacity; the remaining 50% of the capacity remains pretty fragmented.

Global participation
The consolidation so far has not been limited to the home grown players; a lot of foreign players are keen to get into the Indian market. The newfound interest of the global bigwigs in the Indian cement arena has a pretty simple reasoning behind it; huge potential for growth in the medium and the long run, and a strategic base for a possible injection of cement at competitive prices to China and other Asian Countries.

It would only be unfair to expect that the global bigwigs would sit back and watch without being part of the action. Its no wonder that the top ones (Lafarge, Holcim and Heidelberg) have increased their investments in India.
The added advantage
The government initiatives to extend a variety of incentives to the industry to spur growth in the housing and other infrastructure sectors is only going to increase cement demand in the medium term. Having mentioned earlier that the per capita cement consumption in India is very low, the multinational majors see a huge potential for this pie to grow and thus are eager to have a slice through acquisitions.

The acquirer and the acquired
The following acquisitions have happened in the recent past
Grasim: UltraTech(L&T)
ACC: IDCOL
Lafarage : Tisco, RaymondsGujrat Ambuja :DLF, ACCCement FranCais : Zuari
Heidelberg : Mysore Cement
Holcim: Gujarat Ambuja

It’s interesting to note that ACC took over state-owned Industrial Development Corporation of Orissa Ltd (IDCOL) in Dec 2003, only to be merged with by Gujarat Ambuja which in turn has been taken over by Holcim recently. ACC and Gujarat Ambuja are now the two arms of Swiss cement giant Holcim with a 24 per cent share of the Indian market and nearly 35 million tons capacity.

OUR VERDICTThe Indian Cement Industry is evolving and evolving for the good. The action that we have seen is not the end, it is would continue for some time. Though the bigger players have created bigger entities there have isolated smaller entities who would eventually have to come together either to grow or be part of some bigger entity. The cement market is on a growth path(refer other article in this issue on Realty Boom) and as they say “make hay while the sun shines” we expect more global players to enter this growing market.

THE “REALTY” SHOW

By - Swaroop Joshi and Siraj Mukherjee

· An Overview
The dream run started with the onset of the new millennium. India was fast making a mark in the global IT market creating a high demand for the educated intelligentsia. Followed by that was a wave of the BPO industry, requiring a whole new lot of educated urban professionals; and of course land in prime locations to set up their swanky offices . That was the time when better job opportunities, increased per capita income, dual income couples, easier housing finance, nuclear family concepts and higher standards of living fuelled the current real estate boom.
The corporates are never late to join a party. The neo-spender youth was not to be left unnoticed. Entertainment and commercial complexes, hotels, malls and multiplexes that mainly catered the new society burgeoned, further fuelling the real estate boom.

The government also had a part to play. After 100% FDI was allowed in real estate in February 2005, the residential property market got a major boost. The FDI in residential projects led to a spurt in huge 100-acre plus townships. The relaxation of the FDI ceiling saw big names like Dubai-based Emmar Properties — the largest listed real estate developer in the world — joining hands with the Delhi-based MGF Developments to announce India’s largest FDI in the realty sector, amounting to over $500 million in projects with a capital outlay of $4 billion. High economic growth has upheld the demand for real estate. The development of real estate on both the major areas: retail and residential; has been phenomenal. The real estate industry constitutes 5.8-5.9% of India’s GDP. It is said that of every Rupee spent on construction sector, an estimated 75- 80% was added to the country’s GDP. Real estate prices in key cities like Mumbai, Delhi, Gurgaon, Bangalore, Hyderabad and Pune witnessed a 35%hike in prices in 2005, and even 100% in select areas within two years.

The Mumbai Story – Mill Lands to Mall Lands
The Indian Supreme Court on; 7th March 2006; in a verdict sanctioned the sale of 602 acres of prime land in the heart of Mumbai city occupied by 58 mills textile mills to private developers. Prior to the Apex Court judgment, by a ruling, The Bombay High Court had set aside the sale of mill lands here by the National Textile Corporation (NTC), which had flared the prices by more than 20% within four months.

The high profile sale of the 5 National Textile Mills (NTC) in Mumbai to private builders, which was approved by the Supreme Court of India, was the latest spark in the real estate scenario in Mumbai. DLF Universal bought Mumbai Textile mill land for Rs 702 cr. for the construction of a hotel and a shopping mall. Two other NTC mill prime lands were recently auctioned for Rs 862.75 cr. While Shiv Sena leader Manohar Joshi- promoted Kohinoor CTN Ltd purchased Kohinoor Mill No. 3 with a winning bid of Rs 421 cr, financial services group, Indiabulls won the auction for another prime NTC property –Elphinstone Mills – with a bid of Rs 441.75 cr. The mill lands would soon shed the look of a haunted place with plaster peeling off the walls. It won’t be long before the land that once buzzed with industrial activity and produced quantities of yarn and cloth, is transformed into a glitzy glass and chrome building churning out IT products and services. Mumbai would now be set to garnish its inherent beauty by an all new oasis of elite business and leisure which would now swathe colossal residential villas, corporate offices, advertising agencies, art galleries, entertainment centers and aristocratic malls.The ripples of the Apex Court verdict were felt all over the country. Prices surged further in most of the metropolitans. The real estate stocks gained substantially following the Supreme Court verdict on the sale of NTC mill land in Mumbai. Stocks like IndiaBulls, Bombay Dyeing, Godrej Industries, Ruby Mills and Morarjee Realties were the major gainers. Stocks of companies like Hindustan Motors and Bata India, which have property in Kolkata and do not in any way benefit from the decision, also gained substantially.
Though the real estate prices usually keep abreast with the stock markets, the fundamental difference between the two markets surfaced out after the recent crash in the stock markets. Even after the markets shed more than 1/4th of the market cap, real estate prices had remained firm.
The real estate market, like the stock market, is all about supply and demand: when more people want to buy than sell, prices go up, and vice versa. Buyers often buy stocks based on future potential, not for its inherent value. People may invest in real estate for extra income hoping the price would rise further, but real estate still has inherent value because you or someone else can actually live in it or at least rent it out. If the property prices of area, in which a person lives, falls by 10%, is he going to move? Not really. The shifting cost and tiresome efforts involved in moving is not worth it for most of us.Supply and demand also work differently in the housing market. People realise that even if they sell their property for some extra income, they will have to pay the increased price to purchase a new house, which is rather vexing. This phenomenon is causing limited supply and even higher prices. In other words, the price increases are not necessarily about irrational demand, but rather limited supply.Time for a correction?
The Supreme Court ruling, though had produced a sharp price rise in a tussle to gain the prime mill lands, the verdict has also provided an opportunity for unlocking real estate potential in the heart of Mumbai. Rise in supply thus might pull the prices down in the near future.
The recent interest rate hikes would also have a say for the party to end. With fixed home loan rates rising from 7.5 to 10.75 per cent in most commercial banks, there will be a gradual decline in demand for home loans, which in turn would mean the softening of property prices. Coupling the interest hikes, the speculated tax reforms might shoo away those players buying property for the sake of tax benefits.
The other side of the interest hike might be that as the cost of credit goes up, the demand remaining the same, will lead to cost push inflation. The buyer may also feel that as interest rates are going up and property prices are moving up, it is better that he takes the plunge now, thereby spiraling cost push inflation. The projected retail boom might also be one of the reasons that would sustain the real estate boom. But as far as the residential estate prices are concerned, it might not create the necessary drive so as to sustain the prices.
The upward spiral this time has surpassed previous boom cycles. It is observed that the boom is more investor heavy with buyers going in for second and even third homes purely for investment. This means entry of short-term players or speculators into the real estate market has skewed the demand-supply equation in many cities. The speculation in the real estate market is seen to be feeding the asset prices. Speculators in fact might be shooed away from the markets; owing to the decline in demand for home loans and in turn lowering the prices; compelling them to book profits and exit the market. This in turn might unveil a bunch of unused land and residences, thus increasing the overall supply and making the land available to the real consumer.Thus, the overall trends along with supposition of slight retardation in the overall economic growth owing to the sluggish performance of the US economy in the last quarter, coupled with higher interest rates and thecrumbing infrastructures in most of the metros, the real estate boom might call it a day.

Effect of the possible property price fall on the consumer

A Study: The Property Price Fall Coupled with an Interest Rate Hike

The following table shows the monthly EMI a consumer might have to pay for projected price falls and increasing home loan rates. The comparison is vis-a-vis last year’s average rate of 7.25%. The calculations are for commonplace household costing 30 lacs and the loan period being 15 years.

Property Price : 3000000
Loan for years at fixed rate: 15 years
Current EMI (27,386) - @ 7.25%
The analysis shows that though the home loans are getting dearer, an expected price fall might leave the consumer untouched with the EMIs at current rate matching the figure one year ago. At a 10% fall in one year, which might not be a very bold conjecture, the consumer would still end up in paying lesser even at a loan rate of 11.25%.