India, Real Estate and Some Numbers
I just returned after spending a few weeks in New Delhi, India. The incredible pace of growth in India inspired me to see if I can participate in the growth by investing. India does not allow direct investment in equity markets for non-resident Indian citizens (and definitely not not foreigners). I do invest in US-listed ADR (like Infosys) and exchange traded funds (or ETFs like IFN) but I wanted to invest directly. One option available is real-estate.
The numbers when it comes to real-estate just don't add up though. Real-estate in India is incredibly expensive and not just by Indian standards (with per capita GDP of US$ 700 per annum). Here are some numbers:
- Condos in New Delhi, India: 2-bedroom, 1000 sq ft apartment for $200,000. [$200 per sq ft] (Source: 99acres.com)
- Condos in Chicago, USA: 2-bedroom, 1000 sq ft apartment for $400,000 [$400 per sq ft] (Source: Google Housing)
Next, look at agricultural land prices.
- Agricultural land in Faridabad, Haryana (adjacent to New Delhi much like New Jersey is to New York): $250,000 per acre (source: 99acres.com)
- Agricultural land in New Jersey: $12,000 per acre (source: USDA, and for comparison its $6,000 per acre in California and $8,000 per acre in Florida)
The issue of population density pops up every time I discuss this. Let me be clear, the population density of India is much higher than USA. But, when you compare New Jersey and India - New Jersey is actually slightly more densely populated. And New Jersey is much more densely populated than Haryana, India.
The next issue that comes up is one of regulation and availability. Yes, real-estate is regulated in India with laws that prevent easy buying and selling and land records that are poorly maintained. This simply means that the prices can be artificially inflated in the near term (that could last several years) but in the long-term must return to rational values.
Will someone please explain this to me? How can farmers that make less than $1000 per annum continue to own land that is valued (notionally) at several $100K? Are the low rental yields (2-5%) indicative of the bubble?
Update: Today, Wall Street Journal writes about a trader that made billions betting against the real-estate bubble.
I heard the same arguments repeatedly in India - house prices never go down etc. We shall see!"Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond," Mr. Paulson says. "Mortgage experts were too caught up" in the housing boom.
In several interviews, Mr. Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn't enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, "you can't short houses."
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76 comments:
Anshu
Similar story but much more inflated in Bangalore.
1. Rental occupancies are low, rates for "executive apartments" are high, but many are available.
2. There is a tremendous push to SEZ agricultural land in India as you know. Since 80% of India's economy is apparently agriculturally driven, moving outside it to manufacturing, retail, etc has created this inflation for even farm land.
The SEZ argument is being used by several people but the truth is that there is a lot of agricultural land in India and when land prices are 10x higher than in California or Australia, it is not economically efficient to use it plant wheat anyways.
Yes, the story is not limited to Delhi and is true for Bangalore and other Tier 1 and even Tier 2 cities.
Can it be explained by supply and demand? I don't have the numbers, but there might be too much supply of land in california and florida compared to the supply in india. The recent rise in real-estate in India is also due to the growth in demand, right?
Demand is clearly higher than supply currently. But, demand (as Econ 101 taught us) is sensitive to price. In plain English, everyone wants a palace, how many can afford one? And if you are talking of total supply of land in India - I point in my post that there is as much land available as in New Jersey per person. In fact, land is not as constrained a resource as one might be led to believe. There is plenty of land in India and you can always 'create' space by building high rises - effectively creating more built up area. (Yes, that does not translate into more land but it does bring down apartment/condo prices.)
I saw the arguments you brought up being used by Indian real-estate companies and gurus but without backing them up with numbers or comparables.
1. You are comparing post sub-prime crisis rates (US) to booming market rates (India).
2. There is a scarcity in India for Apartments. I have a strong feeling that the builder lobby in India constricts supply in metros to keep prices artificially high. In the long run yes it will balance out, but remember that in India we have seen a boom in the market for the last 4-5 years only.
Nitin,
The apartment prices in Chicago (that I quote here) and New York have only gone up in last 1 year even with the subprime crisis. The builder lobby in India definitely benefits from the restricted supply in the short term but in the medium to long-term they are hurt because high prices mean that the volumes will be low and any bursting of bubble could hurt sentiment for a long time. And with the entry of new players (who don't own land banks at pre-boom prices), the lobbying of existing leaders could be countered by the lobbying of new players. For instance, Mumbai seems to be moving closer to liberalising urban land laws.
In all, I agree that with you that the picture is far from clear. Which to me, means that there could be high volatility.
Anshu,
There is a huge amount of foreign investment in India to start IT & manufacturing companies. These MNCs can definitely afford high prices of real estate to build their offices or plants when they are going to save 10s of millions on labor. Much agricultural land
is being converted into manufacturing (by some officials who take some under-the-table money and issue a license).
Now we come to residential properties. Indian consumer is suddenly feeling very free due to the plethora of financing schemes available. In the days of our parents, no one used to take a loan to buy a house. People used to save and buy the house cash-down.
Add to that the huge demand. Every IT guy in India talks as if he is the second richest person after Bill Gates. In the extremely status and brand conscious society like India, a huge demand has been created.
I have a hiuse here in US but going back and owning a house in India gives me jitters.
Anshu,
I think when you quoted price for a 2 B/R apartment as 200K USD, you must be talking about very central and traditionally high priced areas of N. Delhi. Those areas were never cheaper, even before the housing boom started in 2001 and after.
I have just bought a 3 bed room flat for Rs 34.5 lakhs (88K USD approx)in Faridabad's sector 82, very close to not only Delhi but Noida. The price you quoted is not what you would have to pay for a 2 bed room flat in now hot Gurgaon's prime apartments.
Regarding Agricultral land, well that is also being driven by the real estate boom itself, no one, who buys land for $250K USD per acre is going to use it for agriculture, its only an investment till the city expands further and then such land will make way for either a industrial site or apartments.
So there is still opportunity for investing, though, its not that lucrative as it was untill last year.
Interesting debate...
Recently read an article about asset price bubbles - it seems they occur if three criteria are met:
1. Sudden large displacement in the economy (in India this could be the rapid rise of Income levels in the last few years)
2. Availability of cheap credit (which we can argue also holds true for India with the recent proliferation of home loans)
3. Investor activity becomes euphoric, driving valuations to unsustainable levels (again seems to be the case, with all the hype about investing in India)
So, all in all, I do feel it is a bubble - but then again maybe land is of more 'value' to the Indian consumer than those in the west... (?)
As the more number of high rise buildings are coming up in big cities, the cost of land is expected to grow by leap and bounds.
By this logic, price of (urban) land should go up and price of rural land should go down - you need less of it when you can build more space in urban areas. And the price of condos should fall as now you can build more of them vertically.
This has yet to happen - all prices are high.
Anshu
you are late to the party. But I guess in Real Estate - you are never late to the party. One just has to wait it out.
Some folks invested in multiple properties, reaped their 2-fold or 3-fold profits and have also transferred their money from India to US, to buy real-estate in US.
Average software engineer finds it very hard to buy property in Bay Area. Some folks have used the India option to buy their homes in US.
Anshu
After living in Bangalore for an year and returning back to bay area I am amazed how over priced real estate is in India. The sad thing is that the construction quality and amenities are not even comparable to condos in the US.
I think the reason is primarily high speculative demand. There are supply side constraints on land due to poor infrastructure and regulatory hurdles.
A lot of demand in real estate is for investment purposes and does not constitute real demand (i.e. high proportion of vacant units). The rent/cost of ownership is totally skewed e.g. I was paying rent of INR 15K for a property with a price tag of 45 lakhs (INR 4.5 Million). This works out to rental yield of a mere 4%. Considering that a risk free interest in India is around 9%, the rental yield is very poor and implies that a continued price appreciation expectation is assumed into the prices. This is a classic bubble sign.
So when is the party going to end?
Unless an economic shock occurs (i.e. growth recession, USD depreciation to INR30=$1, etc), the demand will continue to be fairly healthy.
Things may not be as pleasant on the supply side. I have noticed that Indian cities are noticeably smaller than their US counterparts. Currently a city like Bangalore has not grown radially because of poor road connectivity and public transport. In Bay Area, commuting from San Jose to San Francisco (80 KM) is totally feasible. Not so in Bangalore. Sooner or later as the radial and peripheral road networks improve allowing people to commute from afar, the supply of land will increase and I suspect we will see massive corrections to real estate prices.
-Aditya
Hi,
I think we can't compare USA and Indian real sector because in US its very much regulated. However in India its regulated only on paper (I hope you know what I mean). NRI can't buy land /property in India directly but there are ways to do that, plus there are so much unaccounted fund available so I don't think prices will come down in near future.
I agree real estate in India is a
bubble created by easy credit and monetary inflation caused by US current account deficit and yen carry trade. Asset class inflation has to be supported by the income that asset
generates (fundamentals) or a accelerating monetary inflation. 1 % of the transactions determine the price of 100% of the asset class and during asset hyperinflation, that asset acts as a money substitute. Eventually, when the money supply no longer grows at an accelerating pace, more and more people want to transact on an arbitrage by selling the hyperinflated asset. A crash ensues and that asset goes back to its fundamentals (that is supported by the income it generates). Population density is a
spurious argument because you do not exchange people for land but rather money for land. Only thing that matters is the supply of money
(and not people) and demand for land. Anshu, I believe that you have called the bubble correctly.
Real estate prices in India are
too much blown out of proportion
in cities like bangalore, hyderabad
and even in coimbatore, nilgiris (ooty). When the bubble totally bursts the pries will be less then one fourth of what they are now.
Do not put/bet your money now! There are builders in mysore, ooty who promote illegally and there are couple of incidents where they were
told to stop. Beware!
Murali
Murali
Aditya, Murali, Shyam:
It appears we all agree that their appears to be a bubble when we compare Indian real-estate with global markets (currently and historically). To those who say property prices "never go down", I would recommend to see Tokyo 1990s, San Diego 1990s, Florida and Vegas 2007, and so on.
India is expensive even when compared to the emerging markets (BRIC) - I checked prices for condos in Brazil (Sao Paulo) and they are much cheaper by a factor of 5. And remember that Brazilian per capita income is much higher that of India.
The premium properties in certain towns/colonies may not come down that much (rich people don't have to sell!) but when a 3 bedroom flat in Chandigarh's outskirts starts at $250,000 - I get worried.
Anshu,
I second your thought about bubble in Indian Real Estate.
Unfortunately, the prices are driven by the dreams about future and not by the facts in present. It was very difficult for me to digest a rate of Rs. 2400/- per sqft in a remote area of Pune in May-2006. See the features of this area:
- No garden / Playground in 5 KM radius
- No hospital in 5 KM radius
- No police station in 5 KM radius
- No bank in 5 KM radius
- No school in 5KM radius
- No fire-brigade in 5KM radius
- No tar-roads
Even today, this area does not have any of these features, but the rate psqft is Rs. 3200/- !!???
The Rent-to-Cost theory is a real indicator of the bubble being developed in Indian Housing sector.
if the infrastructure exists, then i dont mind paying the extra moneys, but you dont even get 24 hours water, 24 hour electricity, bad roads, pollution, and the value keeps going up. Instead of value going down, it keeps going up. My only explanation is that lots of outside moneys, non indian institutions buying land at these crazy prices. When you see donald trump coming on Tv and saying that real estate in india is cheap, you know it is time to get out.
Another thing to consider is all these ipo's, especially the property related ipo's that come into the market. They raise few hunder millions, and buy land with the proceedings. They can afford to pay double the price, since they just raised 100 million. The ceo dont mind paying 100k or 200k for 1 acre, since he already cashed in at the ipo, and he will be unloading shares every 3 months for atleast 1-2 years.
Majority of these stocks will crash, but the insiders will all cash in and buy land. They will keep diluting shares, until they go bankrupt. 90% of the companies that went ipo between 1998-2000 in the US went bankrupt. Insiders cashed in, but lots of avg joe's who bought shares got screwd.
Institiuions who bring these companies into the market, will support the stock until they get rid of their alloted shares, then these stocks will crash.
Hello, Not sure about here in US but INDIA, all political leaders and big money groups inflate prices artificially. Do you think it's all sustainable in the long run. If non IT people have to buy at these rates, then corruption will increase carzyly ultimately going downward path. But I don't know the short term losing all opputunities in making money is not thinkable.
With all indian concepts ethics and rich histrory where we all going? Where it will be in next 100 years...
Even IT companies from India slowly moving operations to mexico. Labor is about the same or lower, Land is cheap and it is the same time zone.
I've been tracking the bubble on http://indiahousingbubble.blogspot.com
There are excesses in Mumbai and other cities which need to removed for the benefit of end-users who have been priced out of the market
I do not own any real estate in India but I can see why this 'housing bubble' in India may not collapse suddenly like the Dot Com bubble. Another factor which can diffuse the demand in cities from outsourced employees is a trend I hear about multi-nationals setting up centers in smaller towns and rural areas since the culture encourages children staying close to parents.
This certainly is a very sensible discussion, to say the least. Many of you are talking about $250K. Not to mention names, my builder in Bangalore now promotes flats not in the heart but in Whitefield area 6000sqft etc for about 4Crores which is 1M USD. I am talking of apartment, plain vanilla apartment, maybe it looks like a 5star. Lo and behold he is aiming at 400 odd folks to buy such stuff. I bet he will/or has already sold them off. I dont know who are those 400. One argument is folks who sold their ancient acres of land for super prices by their standards. However if I trace Anshu's arguments and those of others, simple points to note are
a. It is not just Realestate boom. SW managers I am told are paid 250K USD in India. And the person who told me is my old boss in one of the SW multinationals (I no long belong to SW industry!) and I know he does not get those salaries in Canada!
b. ROads in India are bad. THough I am more an Indian I have drifted across the world. So if I have heard of folks drive 100km to the bay area every day even a driver driven guy trying it out from Mysore to Bangalore will grow insane and will lose his driver, leave alone the high probability he will be hit and killed very soon in an accident. So central district prices will distinctly be high. I can say that in 1994 our property in Malleswaram was costlier than similar ones in California at around 250K USD.
3. Well this bubble will burst in India. FOr the first time Indians are seeing growth, so soon they will know what is recession.
4. Finally for folks like me, we will want to dispose off our grand properties in Madras/Bangalore to gullible NRIs like you for say a few crores and buy mansions in Atlanta or San Francisco. Let me know how to do the latter (buying in US).
Cheers.
Anshu,
I stumbled upon this blog and Venky's blog (indiahousingbubble.blogspot.com) only today.
I enjoyed reading all the comments and the views, and I am glad I am not the only one who is scratching his head trying to rationalize this.
I plan to track and follow this further through my new blog
http://propertybots.blogspot.com
As an investor in Indian real-estate who is based in the US, I share the angst of many others who are trying to figure out what to do. My short take, as I noted in my recent blog, is that this bubble has room to run due to one thing: poor infrastructure.
Poor infrastructure (highways/roads) means that people have to crowd around in cities. Others have noted this. But I think this is the key issue. I doubt if infrastructure will improve any time soon. So, the only other solution is creation of self-sufficient satellite towns, like the US suburbs. Self-sufficient means these are de-facto new towns/cities, and people don't have to commute to the main city for basic needs (schools, hospitals, jobs etc.).
So, for example, like Naperville is to Chicago. However, people still commute for jobs from Naperville to Chicago. So, India will need not just Napervilles, but actually a mini-Chicago in Naperville, so people don't have to commute.
Hope that makes sense. More on my blog down the line.
No shortage of new money in India. IT millionaires from Cognizant, Infy etc abound. Salaries match the US, $50-60k/yr for an average 30 year old programmer/team lead, and for the seasoned manager in his late thirties or forties exceed 60 lakhs which is $150k. Starting salaries for 22 year old MBAs even from tier-B business schools are in the 6-10 lakh rupee range, and go up by 20-40% a year after that. Unstoppable juggernaut. Sour grapes for those crying on these forums. What is Rs 4500/sf today will be Rs 6500/sf in two years time as more such 22 year olds join the "want-to-buy-a-house" queue, and even if there is any letup in the meantime, there are enough NRIs who were caught out by this unexpected rise and are waiting to buy on the first dip.
One always finds a reason to buy in
a bubble. In bubble many rational
guys become irrational as they catch
the fear of loosing the ride.
Its hard to tell others its a bubble
as most others are in that fear. They
would never accept. I see the same
from all the posts here.
Few rational minds like Buffet
not easily sucked in irrationality
by emotions. They are few. Not
many around them agree with them.
They won't look for agreement by
others.
Something really wrong with the way the builders are playing the price card. There is a fortnightly rise in prices in Mumbai. Even a distance developing area in Navi Mumbai - called Kharghar has quotes of 4.5k Rupees psf, for quality of construction and terrible amenities. There are lot of players who make money in this, the Builder lobby of course, the Broker lobby (who are part financed in some cases by the builders to jack up the prices), the Real Estate advisories like Jones LaSalle Meghraj and its ilk. To top this off the business media just cheerleads this crap. I cant believe how anti people the media is. Screw the software bloke - what about us hardworking citizens and small business men.
Hi Anshu,
I am a lawyer and have advised on many real estate transactions across various jurisdctions in India involving investors, developers and even retail customers. I must say that being a real estate lawyer is a good thing at this point in time.
However, when I look at investments from a personal angle, I have a few thoughts which is dependent on the following criterion.
Firstly, the growth of Indian economy - we are growing at the rate of 8-9% when states like Maharashtra, West Bengal and Gujarat are contributing 25-30% year on year to states like Bihar and UP growing at 1-1.5% in order to bring the national average at 8-9%. Secondly, the growth of income at both urban, semi-urban and rural centres is not constant. Thirdly, the purchasing power parity across all centres have gone up only 12-15% in the last few years, while the costs have gone up by 20-24%. Fourthly, demand has risen considerably leading to expansion of cities without the requisite supply of modern day infrastructure leading to connectivity and accessibilty issues. Fifthly, the bank rates and repayment capacity of an individual versus his commitment to social and family life. Finally, need based investors versus punters.
Now my thoughts, given this situaton, I agree with you, that real estate at the current level will not be able to sustain at this levels in the long term. However, in the short to medium term, I am very bullish and punters are here to ake money. The long term investors, read need based investors, will suffer in the long run as they will not make money as the price that they will exit at will not get them more thn 10-12% returns, which is much lower than returns in a post office scheme, which gives the lowest safe return for long term investors.
Growth is great, IT pros making 200k is great, but why is it a small apartment that was 8 lakhs,that has no 100% electricity, 100% water, no parking spaces, surrounded by bad roads, traffic problems just out of control, more pollution etc etc quads in value?? that apartment should have less value.
Comparing San Fran or San Diego to Indian cities is just crazy. If i am driving a yugo, and making 15k inr and all of a sudden my salary goes tup 60k inr, i am not going to pay 4 times the moneys to buy the same yugo. I will buy the mercedes at 10 times the price, but not the yugo.
If the aparment all of a sudden has 24 hour electricy, 24 hour water, and roads all of a sudden become highways, the pollution goes away, i will pay the 40 lakhs for the same apartment.
you overpay for comfort and luxury.
If you can rent a car for 5rs do you buy it for 500 rs?? same applies for house too... why to buy if you get it for very cheap rent?
There is no simple analysis. A few factors will definitely influence things in next 10 years.
1. A sizeable amount of Indian population (> 300 Million) will be moving into the middle class. As more people gain access to education and get integrated into domestic demand/supply, it with create demand for single family homes and apartments (all the chunu/munus passing out of college and picking up starting level jobs would want to stay separate from their cousins and daddy/mommy), and therefore put pressure on prices to go up.
2. People will have access to other investment vehicles. Historically real estate has been the main source of investment. This may reduce the excess money in the housing market.
3. Some of the areas have really gone up because of growth in IT income and investment. There will most likely be a correction in this space.
My opinion: There may be a correction in near term (1-3 years), but if one is investing for 10-20 years the Delhi market is clearly not overpriced as compared to the New York or any other US city
A decent apartment in Dwarka (suburb of New Delhi) can be bought for close to $100,000. This is not that high given that a similar suburb of New York (New Brunswick or Stamford), will cost three to four times more. An apartment owner in Dwarka is likely to face more demand for his/her place in next 10-15 years than one in NY suburb. And believe me the people living in suburbs of Delhi are likely to be same or more productive for the city economy as the people living in NY suburbs.
It is about enjoying the wealth, if your house goes up from 10 lakhs to 50 lakhs, you cant enjoy your wealth. It would be great, if you are making 1 lakh a month, and your house still cost 10 lakhs. this way you can spend moneys to enjoy life, take your family to vacation, buy your family members stuff. IN US, lets say in texas, you can make $100k and still get a big house for 200k.
If you work for any IT company, you dont have much moneys left after you pay your taxes, your house payment, you repairs, your gas bill for your vehicle and somesuch. Top level guys may keep their jobs, but mid level guys get replaced by younger workers. IF you lose your job at age 35, good luck in getting a job. I got friends in delhi, who are just stressed out. They have been working with companies for 4-5 years, but not much chance to move up in the rankings. They can quit, but they will not get any new jobs at the advanced age of 35. :)
I think most of those investments are hidden place for black money (that means no tax paid on that amount). Here are some more causes, almost 99.99% people never pay the tax they are suppose to pay (congress chief Sonia never had a car/house on her name, she declared in tax docs, according to finance minister INDIA have only 140000 people who have above Rs.1M income per year. it is a national shame, but works), Also, they can’t hold this huge sum of liquid money like 100kg bags due to security reasons and fake currency fears. If they buy property they will pay huge liquid cash and register for very minimum amount to escape registration fees and also convert black money into a property. Also, according to some study 4-7% of circulating cash is fake in INDIA? So no wonder why it is hyped so much? After working 10 years in US with six figures salary, I can buy house here but not in Bangalore? I hope our country will not become another Argentina?
most of the indians dont pay taxes, but if you work for IT company, you pay taxes( you cant hide your income). That is why India has bad roads, bad hospitals bad everything. People dont want to pay any taxes to improve the infrastructure. The hard working people who pay taxes, they get stressed out and get screwd.
One of my freinds said that property value went up because MCdonalds might come into his neighborhood. Ok, so mcdonadls come, so why the jump in price. you get to eat fatty foods and get high blood pressure, become diabetic and die. so you are paying more money to die early. :)
( That big mac is still great)
Hi
Someone said Managers in India IT gets 250K$. I can bet he has gone insane. Even google won't pay this much and Indian brands pay 10-12L for maangers. I perosnally am manger in a good IT company but still getting 18L. And I have expericne of 9 years product of IIT level college in CS.
But still avg salary won't be moer than 12 in my exp and we are old when we talk of IT industry of India.. Masses are still with 3-4 years of exp.
Its surely a bubble. Sooner or later it will burst. I am waiting for IT recession in US and than we will talk who can pay EMI of 50K/month. I had seen last recession and people were begging to work for free in front of me but still were kicked out..And that time IT industry was very very small than what we are now. Results would be disastrous for IT as well as every other sector that expects million $ is everyone game..
Dear Anshu,
I have invested in Noida, Gr. Noida and I also invest in properties within Delhi.
I see that everyone has a mixed opinion regarding Indian Real Estate, mostly leaning towards the bubble. However my feel is that bubble exists in geographic locations lacking demand / population. New job opportunities and increasing income level is frequently giving birth to new home-buyers, which in turn is preventing a bubble. I feel that India is experiencing, and will continue to experience a healthy correction versus a Florida & Vegas 2007.
Another things is.....indian buildings have never looked this good ever, and the price we are paying today is for the modern look and feel in general. It would be hard to compare it to historical prices because Indian neighborhood, and lifestyle in these neighborhoods have significantly changed.
Who says Supply of Apartments/Condos is less in Bangalore. I live in bangalore for the past 6 years and can show you many ready to occupy/but not occupied apts in and around bangalore. But the prices have not gone down because the real estate developers and some local newspapers still lying about prices going high. This is just hype. Prices may not go down in the near term since land developers don't want to show a different picture to public. But the fact is that in bangalore and rest of india, the demand of real estate is slowing down because of artificially increased prices. Earlier whereever you go, you can hear discussions about comparing & booking Apts, but nowadays no one talks about it. May be people started thinking about how to pay their EMIs if there's a slowdown.
Srikanth
I see people comparing Apartments in India with US and that is just plain crazy! So when we compare New jersey or New york with Delhi or Gurgoan or Bangalore, the comparison should be all-encompassing. How about comparing the Roads, Highways, Traffic Jams, Water, Medical Facilities, and most importantly Security! Gone are the days when people considered India as more "secure" than US. Security nowadays is as scarce as water in many parts of our country! Atleast you people in US can be sure someone will arrive at your doorstep if you call 911, but here we are not sure even if someone will pickup the phone if we call 100! So why paying through the nose for something which is of no quality?
See a comparison as to what it takes to buy vs rent in Bangalore. It indicates that a huge price correction is in the offing
http://bangalore.craigslist.co.in/rfs/674729675.html
Srikanth, Krishna, Paul & others that have commented - I see a broad consensus here on the high probability of this being a bubble. There are only 2 long term solutions to a bubble like this - prices stall while economy catches up over years; or, the prices correct.
I have so far stayed away from investing in Indian real-estate although I love the over all growth story. I continue to invest in ICICI Bank and others that are linked to the broader India growth story.
Thanks for your informative comments. This seems to be a popular topic and I am glad my post provided an additional forum for some good discussion.
Have been trying to read a lot about who actually is buying these houses? I think I am one of those oft quoted middle class (an annual income of about 5 Lacs) that is supposedly driving this boom. But fact is I haven’t bought a house yet. Some hard facts which steeled my decision were:-
1. Upto mid 2007 - I had stayed for 5 years in Delhi in a centrally located place (Vikas Puri), paid a rent of Rs 5,500/- per month for a 2 BHK with abudant parking space and facing a big park. The house owner proudly claimed its market value was about 1.5 Crores (must be 3.5 Crores now!) Surely a very poor return for money he got. But then this man had bought it way back in 1980 for less then 10 Lacs.
2. I booked a “builder floor” in Delhi around early 2006. The builder was into buying houses, demolishing them and rebuilding into floors. I booked the first floor of a 4 storey construction (90 Sq Yd) for 16.5 Lacs in Uttam Nagar. This was in mid 2006. Then the boom accelerated by end 2006…they said it was now worth 25 Lacs. The builder got greedy, slowed construction and all the related tricks. I finally took his offer to take double my deposit and quit. The house still isn’t sold. Its mid 2008. The builder is bankrupt and has fled. The story is repeating in the entire area.
3. I came to Pune. The traffic was horrible, the pollution worser, the cost of everything was three times what it was in Delhi starting from fruits to furniture. The houses were also as expensive! Far flung outskirts, no electricity or water….but lot of nice morphed photos and glossy brochures…and the usual promise of once in a lifetime investment opportunity. Everyone said it was the IT.
4. Then I met an IT graduate (the city is called the Oxford of the East)…this guy told me that offer letters handed out after Campus interviews had joining dates six months later and very few got actual confirmations. Half the guys didn’t even get interviewed. Some smaller institutes didn’t even get visited by the industry. Also, this was in sharp contrast to last year when almost everyone got a job. So it isn’t the IT anymore!
5. Lastly, I went to a small town in MP. This one was untouched by builders. An empty 200 Sq Mtr plot with a tube well (at least ground water supply assured), stable electricity supply and in a well developed area on the outskirts was quoting for Rs 75,000/-. The airport at Bhopal was 20 Kms away, the railway station the same. That was what I used to travel in Delhi or Pune too! The vegetables and fruits were half the price in Delhi and one quarter the price in Pune. Full time domestic help was available in plenty at as low as Rs 1000/- pm. The schools were roughly the same standard but charged one tenth what similar schools charged in Delhi and Pune.
What did I conclude? Stay on rent in a big city while you work (remember Delhi @ Rs 5,500/- ….and dropping). Build yourself a nice palatial bungalow in a small town and relax there once you retire. The amentities (hospitals etc) are still as closeby as in a metro or worst case you can fly down to Delhi for Rs 3,000/-.
Compare that with buying a 1 Crore designer flat adjacent to a slum (or a suburb 60 Kms away from city centre) and paying all your salary as EMI all your life.
Bottomline is…..either it crashes, else I am not buying!!
Anonymous from Delhi/Pune/Bhopal: That is a great story. I am sure this "inconvenient truth" is being ignored by many today only to come bite back in future.
Please come back and let me know if and when you buy something.
Cheers!
well i feel sooner or later things will either crash or will stable out... Not many people can buy such expensive flats and if growth occurs like this than outsourcing will stop since main reason is still low cost and if that is lost than oursorucing will happen to China, Pjhilipines, Brazil and what not..
so I feel govt. should do sth to make things cheap so that overall cost remain low as we will lose on this front also like we had lost in every other industry to China..
Lets make IT industry, It products rather than hyrping real estate and killing the IT industry..
Real estate falling across India
http://economictimes.indiatimes.com/Markets/Real_Estate/Realty_does_reality_check_prices_fall_15-20_in_Q1/articleshow/3028660.cms
Love this thread, great posts and opinions by everyone. I would like to add something I found insane when I was in India recently.
I met with a high profile CEO of a global firm who said "we just bought some property in Manhattan because Gurgaon is too expensive"
I'll let that settle in for a second or two or as long as it takes. THINK ABOUT IT property is more expensive to (LEASE, BUY) in Gurgaon as compared to the financial hub of the global markets.
I was taken back and asked again well why get property in Manhattan when all your developers are in India. To which he stated "Indian programmers want too much money and they are constantly jumping ships, we have decided to get architects in states who work with programmers in ROMANIA" thats right eastern Europe is fast turning into the hot destination....
I see a sign of two things SUPER HIGH REAL ESTATE with the SILICON VALLEY CULTURE OF PRE-INTERNET BUBBLE.
Great thread again....
Good one dude and lot of good arguments out on this one. Finding your blog wasn't tought at all ..as u rightly said...
But..Anshu ..isnt this what demand/supply and their correlation obviously to price is all about. Its a bubble all right ...but rightly fueled by the boom in probably all sectors in India ...IT to start with and now everyone else seems to have joined the party ...Share market ...hospitals ....theres money everywhere.
There is no dearth of people who want to buy houses ...I have a 2BHK in bangalore which probably is priced at around 50L now(I invested at the right time ...4 years back) ...is there a dearth of people though who want to buy my apartment ...guess not.
But then I would disagree with people who say the prices wont go down. At least in Bangalore they have gone down (not from their original prices obviously but from their peak levels)...though still India (and Indians) are booming ...
On a different and a slightly pessimistic note though - India's crumbling infrastructure and peoples attitudes towards each other and society in general - if not anything else ...these 2 factors are what I feel have the greatest chances of stopping India from what it could and what it should have been.
-Anil
Anshu and friends:
I have been pointing out the bubble burst in February 2008 through my blog. This was post the fall in the stock market. We need one rise and more baby speculators to get in - and this will happen once the stock markets retrace in India - this has started - the next fall will cause distress and the crack of the Indian real estate market. This is how I anticipate it will pan out.
just to add: www.eclectic-investor.blogspot.com
This seems to interesting discussion on real estate bubble in India. However I tend to think in terms of India growth story and its affect on real estate market. I found online magazine INFRASTRUCTURE TODAY at
http://www.constructionupdate.com/construct/infra/index.htm and wanted to share with members of this blog.
This website provides information on infrastructure development and amazing growth happening in India. It has articles on various development, problems and happenings in India in industry like Aviation, Roads/expressways, Electricity, Logistics, Ports, Oil, Retail and so on. It seems there is so much growth happening that there will lot jobs and money making opportunities for common people of India. There are airports, expressways coming in shorter period of time which we never saw 10 years back. It explains how cities in India are growing, also problems in cities. It also explains how $350 billion required for this investment will come from and sources behind it.
I seem to think that due to this increase in purchasing power of people, the real estate will continue to grow further. We may try to compare cities of USA with cities in India, but the main difference is, there is no growth in USA in industry compare to GROWTH happening in India. Investments from private companies by buying land for new building companies, malls, create economic prosperity. This will drive real estate higher. Real estate in India will not burst like USA. Yes, prices correction will happen but it will not burst like USA or UK.
I agree most people say India is fastest growing economy and I do agree to some extent. But still main questions remains to be unanswered.
a) Which industry in India will create people where a fresher can earn say 30K/months and a experience person earn say 10L in 3-4 years except IT/ITes. I am talking of common engineer or MBA not from IIMs as there count is very very less to impact the basic demand.
b) I am from village. The land is decreasing/head day by day. A farmer has to live with his family anyway and consequently the prices of food will increase as he also needs to pay for mobile or other stuff.
c) What will happen to landless masses, poor people, private workers etc. Surely it would create unrest and govt. will take action to curb prices through all means.
d) About prices of flats, I do wonder who can buy a flat of 50L-1crore except a minuscule section of Indian and NRIs?. We are three brothers and we all are from BITS Pilani (at par with IIT) we earn good but still we togetehr only can afford a decent house in Bangalore or Delhi.. Think about how a single person will afford that..
e) Once recession strikes the IT industry as hirings are delayed, joining postponed as of today and that indicates its going slow if not recession how many people would ahve guts to go for such heavy loans?.
As all data from govt. indicates, the number of sales has decreased considerably in all metros due to exorbitant prices and surely price correction has already happen and will continue till they can create enough customers to jump in...
Above all, u are not correctly saying US economy is not growing. US economic growth is very less as comapred to India but in absolute terms its much bigger than India..
Its like if i make 10Rs from 100Rs its 10% but if i had 100000Rs and i make 100 than still its .0001% India is former and US is latter.
regards
Krsihna
Anshu,
One attribute I do not see in your analysis is the amount of 'black money' that goes into real estate. When you compare New Jersey to Haryana, the biggest difference I see right away is the 'black money'. Real estate is the safest bet for all those that have loads of 'black money'. When a real estate transaction happens (eg. agricultural land), the official price of the transaction would be very low compared to the actual price of the transaction. This I think is the biggest factor contributing to the high real estate price. I wouldn't call this a bubble, because as long the 'black money' is there in India, the bubble will be there - in which case it would not be a bubble.
Thanks,
Bhargavan
This is anonymous from Delhi/Pune/Bhopal again!
I have been following the real estate forums intently.
Few collated truths in point form below……………
1. Prices are artificial (never thought Gurgaon/Pune will be as expensive as US/UK)
2. Only a miniscule 1 or 2% of the population can afford these houses.
3. Those who get caught in this trap and buy a 50 Lac pigeonhole on the city fringes are consigned to a life of endless EMIs. Maybe we’ll soon have the Japanese model wherein you can pass it on to the kids coz the extended repayment periods (courtesy rising interests) will outlive you.
4. Appreciation is over if you buy now. If you think your 50 Lac thing on the outskirts with no proper road and water/sevage/security is going to become more expensive then a mediterranean villa in 5 years….it will be a miracle. Yes….anything can happen in India. When you have a large population, you also have a proportionatly large number of fools.
5. You can’t get a loan / tax rebate for paying rent. You got to pay it out of your salary. So rents will continue to be a paltry few thousand, even if your 2BHK is of half a crore or two crore or ten crore.
And a few truthful fantasies in continuation……………
6. How many houses will an NRI / Businessman / IT Professional Buy want to buy? Two, Three, Five….maybe Seven?? When all those many houses are constructed and sold (and these many are being built all around us)….but what then? Will we have ghost towns? Empty townships with no residents but empty 1.5 BHKs worth 1 crore each?
7. Has anyone thought about socio-economic fallouts? Middle class salaried families turning naxalites? When you can’t even buy a decent house when the economy is booming, would you not want social justice?
8. A long term cycle like Nepal? A revolution?
IT city man, tired of city, goes to forest, to become holy man.
He walks for 5 weeks, then hears a noise, it is the noise of another city man, but he is running round and round with his hands attached to a tigers tail, while the tiger is circling the tree. New city man asks the old city man, why do you have your hands attached to the tigers tail. Old city man, still circling the tree says, man you dont know how great it feels to have your hands attached to the tigers tail. It feels like orgasm. why dont you try this one time, and you will know how i feel. City man 2, puts his blue tooth phone to the side, drops his faded jeans, and tells the old city man, ok let me try it one time. City man 2 gets to the same speed as city man 1, and clutches the tigers tail. city man 1 let go of the tail, and asks city man 2, does it feel good. MR. blue tooth man say, yes, it does feel good. old city man says bye bye, make sure tiger doesnt eat you while you are having your orgasm.
Good luck buying 3 crore houses.
The "Black Money" factor is definitely important. As we all know, the actual price paid for a house is 50% (or more) underhand and paid in cash.
This firstly makes the banks secure. Unlike the US, people can't just walk away from their home loans regardless of how high the interest rate or how worthless the property coz for a 50 Lac loan they've got their own 50 Lac of black money stuck.
Secondly, this will slow down the bubble's bursting. Obviously people will hold on to the straws till they absolutely drown.
Thirdly, I think gradually as demand plummets and the appreciation vanishes - we will have many people drowning due to an increasing loan repayment burden, higher costs of living (courtesy inflation, oil) plus a lack of buyers on whom they can offload this (non performing) asset.
For those who sink...it will be a life's savings lost. Much worser then the US considering you lose all your black money too and nobody cares about that coz its not there to be seen!
For those who survive...still negative or zero returns on the 1 Crore 3 BHK.
Dlf stock 52 week high about 1225( jan 08)
Todays price 609.75
If all these properties going to be at a higher price in 2 years, then dlf should be at 2500 today.Dlf owns land, so this stock should be ahead of the market. Me thinkie, DLF not going to sniff 2500 in the near future. Them guys who bought at 1200 probably have to wait a while to get even.
Dear rte,
The price of DLF you are quoting is its life time high price, where SENSEX was also at its high. So, when you evaluate real estate market with this price it implies that you are assuming that the share price of DLF is fairly priced. Which might not be the case. Indian infrastructure stocks were overvalued because of over optimistic future expectations and sector specific new fund launches. So the bottom line is how to measure that price of 1225 was correct or price of 609.75??? There might be the case that even 609.75 is already ahead of the market which means that it factors in the expectations of higher real estate pricees in Future.
More Over, Economic theory says that house prices can not grow more than that the growth of income level. So real estate appreciating at the rate of whopping more than 25.0% will have to regress in future to the mean level. But the other possibility can be that prices will grow at that level in future but have experienced a paradigm shift in valuation whic hmight not reverse.
Very good thread.
I recently bought property in Gujarat.
After stating in USA for 1 & 1/2 years with my all saving of 10Lac(mostly invested in equity), though buying of some land in outskirt of Ahmedabad. When I went to India in end of 2007, Real Estate is so overvalued, all the builder then started selling their land in super builtup area, that too for far away from city area, they will ask Rs 300/- for sq Meter with minimum area of 400 sq.meter area, actually you will get only 350 sq.meter(builtup) area as you will end-up paying for front road, your fence wall etc, etc. that did not fit in my mind, I diverted my mind to buy some bungalow in G'nagar rather then buying land far away from the city.
Bungalow price in Gandhinagar starts with 40Lac to 1 corer depending on the location & size of area. My biggest problem was Money(Guess, it's everybody problem). I had only 10Lac, I decided to apply for home loan to buy bunglow, then another problem. Most of the builder want 70-80% of their money in black payment, to avoid 12% Gaining tax. and I will get home loan based of Bill of sale of the property. :-( Hence I need to avoid idea of buying property from builder, finally I got the property from individual seller through the so called Agent(As you all know, in India to become agent you don't need any certificate or degree), The Sell price of property was 67Lac, finally I got the property in 71Lac with Registration etc. I am paying Rs 60K/Month installment for my 55Lac home loan.
As I am currently living in USA, I am trying to rent out my bungalow around Rs. 15000/-, I have not got any one yet.
However, at age of 31 I am proud to be owner of property in very good locality where I grown-up. I would like to live my retired life in this city. :-)..
We still hold some agriculture land in Gujarat, but now scenario for agriculture land has alos changed as big company like RNRL, and other Natural resources company started setting up big big vegetable/Frozen market, these company wants to buy big chunk of agriculture lands to grow thier vegetables...and hence prices of agriculture land in rural area has also increased dramatically.
I am from Mumbai. Back in the late 80's and early 90's there was a bubble in Mumbai. My father purchased a flat in Mumbai back in 1984 for 2 lacs... By 1991 the "perceived" price of our flat had reached 20 lacs... Then the bubble burst and real estate was down for years... In 2002 I purchased a bigger flat for 20 lacs and sold the old one for 10 lacs (lost 50% of the peak 1991 value). Today the cost of my flat is over 1 crore... I have lived in bay area for over 12 years... My wife and I both work in hitech and we cannot afford a flat in Mumbai today...
I am hearing this bubble story only on blogs or forums. It seems Indian media is private property of politicians and profit-earning businesses. It is only concerned about Cricket to mis-direct public and keep it in illusion.
Question is who creates this bubble?
I think ultimately public is responsible who lets the bubble occur in first place and it is the only one which suffers. Will there a burst like sub-prime burst in USA.
Can we do something to burst this bubble, it seems to be taking everyone of us into it and if it ever bursts that burst will be useless for us.
BTW nice blog
Hi Anshu, This is a very interesting discussion you have started.....is there a bubble in Indian property or not? I have been an active investor in the NCR-Delhi, Gurgaon & Faridabad for over 5 years. I live in Ny and travel to India a few times a year. I also write a RE blog-pl see www.meridharti.com. Based on the discussion on your blog, I would like to point out a few things:
1. Generalizations based on prices seen on 99acres or any other website is not a good enough basis for discussion. To explain, if prices indeed were $250K/acre in F'bad and $20K/acre in NJ it should reflect in the price of apartments. NJ (as u and everybody on this blog knows) is v.large and so is F'bad. In F'bad, aptts are available at Rs.1500 psf (less than 20 mts from Delhi border) where as in NJ (Newport/Exchange Place-20 mts from NY) the cheapest price is in the vicinity of $450 psf. Therefore, either the developers in NJ are making a much larger gross profit or the developers in F'bad are selling at minimal margin. Economics teaches us that neither of those situations is sustainable. Therefore, it brings me back to the initial premise of the discussion -F'bad is at $250K/acre and NJ is at $20K. This is incorrect.
2. I must however agree that prices in several pockets in India are way out of proportion. I would however resist describing the market to be caught in a bubble. Again, pl read www.meridharti.com
We can continue this discussion in more detail later.
Ashish
I feel its a bubble. And it will burst sooner or later on its own thats why its called bubble..
I don;t know NY but how can a economy sustain such prices when nobody can afford such flats..
If price grow like this, something or other will happen to control that even by govt. (whcih lacks will as their own money is at stake in form of black money)..
anyway i wish house to be available for everyone from a teacher or primary school in Delhi to CEO of XYZ Corp.. If the benefits are not reaching masses, there is NO use of such development and such divide will give rise to crime and more serious Naxal kind of problems that will bring everything to halt..
So inclusvie growth is need of hour not the growth of a small section..
Well I guess while comparing down town Jersey city & Faridabad the profit margin of realtors is not a good measure. It's more of a affodability. Can you have a sufficient income while staying in Faridabad to support that price level ? If the property is for commercial purpose is it going to generate break even revenue ? What kind of crop is going to give you such a return to sustain $200K/ acre price ? While comparing with US housing prices also compare the income level & infrastructure.
Foreclosure has already started in India since 2007 but the nature of foreclosure is hidden. Large banks, who had exposure to housing loan segment have started a real-estate service arm, who are selling the defaulting property to another home buyers under the pretext of helping property selection. One can check the various ads by ICICI Property Services Group.
These banks took a position on both side & created the bubble. For an example bank A gave a loan to builder B then they gave housing loan to apartment buyers as home loan. [Pre approved scheme] That’s how bank made a risk less huge profit with arbitrage. This is the big hole in Indian Banking law, which does not have chinees wall policy for financial institutions. There is a high co-relation between bank’s growth & real estate price surge.
For further details one can asses the balance sheet of top 10 banks.
I do agree there was a huge inflow of foreign funds which also heat up the segment but this fund sponsored only large projects. Local bank & black money is the sole contributor for 60% market.
That's an interesting observation.
I do want to take the opportunity to address a commonly held belief about the adverse effect of foreign funds into Indian realty. Foreign funds investing in RE in India obviously are investing in India since they find the market attractive for them to make healthy returns. Therefore, if the markets are mispriced (ie.if developers are asking for unrealistic valuations), the likelihood is these investors will not invest (this is not to say these investors cannot make mistakes but they are likely to be the first group to know when markets are mispriced) and over time markets will correct. This is what has happened over the past 12 months. Whilst end user prices have not fallen substantially, there has been a significant drop in valuations that investors are willing to pay to developers to partner with them. It would therefore be premature to characterize the entire market to be mispriced or to be in a bubble. For more specific details, please read www.meridharti.com.
If markets continued to be mispriced, investors would flee since they would not be able to sell the produc and make money. Eventually, as their flight of capital, markets would correct. In summary, i think foreign funds are good for the markets since they help in the process of price discovery.
later,
Ashish
current situation:
www.india-awake.blogspot.com
this is an interesting blog. Why are all the posts(comments) here showing only time and no date when they were posted. It would be helpful in the long run.
In an endavour to enrich the experience of our readers on www.meridharti.com, we will attempt to bring them opinions and perspectives of leading industry leaders in India. Towards that end, today, we have an article which has been contributed by the CEO of Realtech Group. To read the article, please visit www.meridharti.com
Happy reading.
Ashish Abrol
V interesting discussion...i was in India recently and saw a lot of 'promotions' from various builders in NCR...clearly having difficulty in clearing inventory.
With 3.5 times more people and 3 times less land ..the overall availability of land is 10 times less in India than US....which of course pales in comparison to 50 times difference in Income. Mostly the inability to commute due to poor infrastructure adds to the challenges. Delhi and Mumbai have been in top 10 most expensive places for real estate (in absolute terms) almost a decade. Short term correction..long term growth would be my vote
Well I agree with people and India growth story. But unable to understand why DLF the pioneer is tradind now 20% below its issue price.. And belive me, this is just the start :)
Now one will see the bubble burst which everyone was waiting for in next 5-6 months. See tomorrow the Indian Stock market and real estate can't remain aloof from that:)..
Happy INVESTING in real state now:).. Its best time to get out of shares or real states if ur view is short term or you can't sustain the same in case of layoff.
This is global crisis i feel.. US all bad news be it floods, war, economy, home crisis.. India again same story 14 years high inflation, unstable govt., election next year and thus govt. will take tough steps to please public and what not...
so in next one year, people like us surely would loose money if we invest or remain invested anywhere..
One thing missed when comparing areas... Large area of Texas, Arizona is desert where no one can live.. And they are biggest states of US..
So with that the land ratio/head is US will further come close to that in India..
As Landsmiths.com we have always said that heavy correction is on its way.Dlf issue is no surprise.But flow of funds and NRI intrest in India reality companies are bound to hit back.This will infuse organised players to create a mark.We are taking care of Prject liasions and managments for developers and are in close touch for growth and developing methods they are gaining.Reachers at our Portal have completed the study ffor NRI inventments in indian growth and will be released in July in UK.
Many folks mentioned here India has more population and less land , so the price is justified.
Did you ever think the entire Indian population is living less than 2% of entire Indian land.
If the 2% goes up to 3% then what will happen?. We can build homes for another 50 crore people.
Hi Anshu
I am also from valey and following indian real estate prices closely. Let me tell you people are sitting on real estate bubble which is going to burst anytime now.
I follow Mumbai prices and they are at ridiculous levels. The market is speculative. I see the market getting crashed similar to 1991 when Stock markets crashed, real estate crashed too.
Its only matter of time, some people are in India are not buying this idea and will get hard hit when their Cr worth flats would sell around 50% of value, Imagine with Intrest rates close to 14% lot of ppl are going to get TRAPPED in properties braught at VERY HIGH VALUE and paying VERY HIGH EMI, and loosing the opportunity to invest in Stocks at same time.....
ANSHU
WHAT U R SAYING IS NOT TRUE.
India does not allow direct investment in equity markets for non-resident Indian citizens (and definitely not not foreigners). I do invest in US-listed ADR (like Infosys) and exchange traded funds (or ETFs like IFN) but I wanted to invest directly. One option available is real-estate.
I AM AN NRI AND LIVE IN FLORIDA AND CAN TRADE THE INDIAN STOCK MARKET FROM MY LAPTOP AS LONG AS I HAVE AN INTERNET CONNECTION.
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