Thoughts on an Indian real estate bubble

Last weekend, I linked to a post which had a report from Lloyds TSB International about India being the fastest real estate market in the world in the last decade where property prices have risen by 284%.

This reminded me of a comment that was posted on the Suggest a Topic page some time ago, here it is:

Rakesh May 15, 2012 at 5:16 pm [edit]

You should write some articles on HUGE REAL ESTATE MARKET in India. Where are we heading? Are we going USA / Europe / UAE direction? OR India has potential to absorb all the way and will come out stronger and not like these other countries faced the position in real estate.

My opinion on this is that the price rise we have seen in the recent past is simply unsustainable but whether the whole market will collapse the US way, and a bubble in that sense is forming – I don’t know.

I’ve stated this view several times in comments earlier as well, and I have many reasons to think this way, but I’ll talk about two today, which have been on my mind recently.

In big cities where house prices are really high, for most people, there is no way to buy a house except to take a substantial loan and then be burdened by an EMI for a very very long period. I know a few people who have done this and the negative impact this makes on your lifestyle far outweighs any benefit that you get out of this.

I think sooner or later a lot more people will come around to this view and resist the peer pressure which is largely the reason people make these type of commitments in the first place.

The second reason is to do with land acquisition and developing real estate, which is a huge problem right now. There is a lot of land that developers aren’t able to acquire and in cases where they are able to acquire land, they sit on a lot of it so that the prices don’t collapse.

There is corruption and policy paralysis, and a great example of that are the thousands (if not lakhs) of buyers in the Greater Noida area who are stuck with EMIs on houses that don’t see much hope of getting constructed, and are in a terrible situation right now.

This situation also needs to change or demand for units that are under construction will fall down because anyone who has witnessed the hardship that you have to face if your money gets stuck in such a developments vows to never get into another transaction of this type ever again, and strongly influences anyone who is watching the situation.

In my opinion, the consequence of this will either be an improvement in supply where policy making is better or a reduction in demand because of the uncertainty such a thing brings about and both will lead to fall in prices.

Finally, from the perspective of an individual, I think you have to see how much sense it makes to buy a house thinking of it as an asset when deep down you know it is not likely that you will sell it because you are making a profit, and it will behave more like a liability because of the huge EMI burden that it places on you.

72 thoughts on “Thoughts on an Indian real estate bubble”

  1. Problem with Indian Real Estate bubble burst will be quite devastating as we have never seen something like this in the past where as in US Real Estate Ups and downs are kind of part of life as it a pattern of going up for 2-3 years and downward trend ( correction) for 3-4 years in every decade if you look at the Real Estate trend in US.

    Apart from that we have very big issue with transparency on transactions in Real Estate transactions in India..

    So i would say wait and watch for one more year to see the REAL value in Real Estate

  2. The Indian real estate has a lot to say. Like in Greater Noida people stuck in the situation where there is no scenario to come out with the best resolution. I totally agree with you that just because of heavy EMIs no one can think of it as a profitable scheme for investing.

  3. Guys, please realize that most property development companies are owned or heavily invested in by politicians, babus, govt employees and some foreign investors. There is real demand in the 20-60 bracket and not beyond. Since all property is being built and bought out of dirty money, who cares if it cant be sold in time right? Afterall supply of money is unlimited from mining, natural resources etc. there is also lots of money printing going on and banks risk is covered in lending to the these builders since govt will cover them with Your tax money. this is robbery in name of inflation, where your savings now buy you less and Less and the rupee is worthless.

    Please buy where it is still reasonable if you must, and keep money for the rainy day. I am sure some of your are thinking i can run away if i cant pay or if prices crash, but your parents and gurantors are still on the hook, Indian bankers operate at low risk with loans.

    At least wait till 2014 elections before making big ticket purchases.

  4. Hi Guys,

    Very intresting discussion. The population logic does not makes sesnse. Even with IT people how many are earning more than 10L per annum. Me and my wife work for IT company very big IT company, we will get loan to buy that 60L home. However i do not feel its worth for that money. I am native of bangalore,now for only one reason i would like to stay in bangalore i.e my job. If they move my job to any smaller city i will happily go there may be i will build a home there. Still then wait and watch.

    Praveen

  5. dear,
    My feeling is – unless it is for investment purpose, there is no point in buying a house by EMI way, it will eat up all your money. Just download any EMI calculator and check how much you have paid during full tenure. Better is – paying rent and keep investments in plots.

  6. Very interesting discussion – I am so glad to see the young ones being responsible on this board.

    In the “Big Short” by Michael Lewis, he talks of cornwall capital(3 very intelligent guys come together as partners and are very successful eventually). One of the guys owned real-estate in the bay area and made an observation – if real-estate is priced 10-20 times the annual rent it can generate, then there is a bubble! He sold it and cashed in before the bubble burst big-time( in case you are wondering what happened) before moving onto shorting the banks(where he made MORE money).

    @20Lacs(including all costs), a flat in bangalore in 2007 – today generates no more than Rs72000 per year(exluding monthly maintenance of Rs 1000). That is a total earning of 60000 per year and it requires 33 years to recover principle(if rents stay flat). With increasing rents 5% year over year, it is to be expected to recover the original principle in 20 years…real earnings so to say are expected to be in year 21(rent will be 14000 per month.

    The example I have chosen is – really miniscule by today’s standards where anybody and everybody is using the “C” word (crore). Yet, it sounds such a tough climb(but possible).

    Now, you substitute the numbers – with 40L or 60L or 1.5Crores – rents must be in an upward trend and so should salaries everywhere t0 be able to afford.

    It is reasonable to expect someone to pay 6k-14k in any nook and corner of india metros. Does it make sense to expect people to pay 20k-40k in rents a 10 years from now?

    God sustain this bubble – What goes up must come down!

  7. What I am talking about is essentially the price/rent ratio. If this ratio is way off, it is time to park your money somewhere else.

    Atleast in the USA, equity in the property aside, if an investment property is priced more than 10-20 times its annual rent…then it is a loss-making prospect for the investor(imagine, paying 100P/E for hot growth stocks ). I am quoting from memory, but the cornwall capital fella realized that when the price/rent ratio was in the high 30s, he had to bail.

    The example I chose was an investment property for 20L bought in 2007. Today it is earning no more than the numbers I gave. As I said, forgetting equity for a moment (which is purely speculative in bangalore today), just by virtue of rent being collected today, it will take nearly 20-33 years to recover the invested principle back.

    Now, imagine if 40L or 60L or 1Cr was invested – you will have to end up living with the same results…However, one catch is, you will need junta paying 12k, 18kk, 30k respectively as rents. How many today have the potential to rent and pay up progressively higher rents as years roll?

    With salaries flattening(finally!) in the IT sector, real-estate returns saturating or evaportaing(soon), I suspect people may have to actually drop rents to keep the units occupied. Hence, my point that INR 6-15k is the sweet spot for any renter. Yet, with collecting rents like this an investor will have to wait a very long time. Today, the 10yr tax-free bonds which were floated last year seem juicier. Or the stock market for better returns on a compounded annual basis.

    Granted, we can always count on inflation…which unfortunately means high prices for everything and a devalued indian rupee.

    Hope this clears

    1. I think what you said is true. Keeping in view the earning , salaries of Indians, the real estate prices are insane. Besides, unless one has an elaborate plan to sell it off for 100% profit in 3 years, there is almost negligible return on investments in real estate at prevailing rates.

      Actually, the rates prevailing in say 2003, 4 are more in line with the current earnings . 60 lacs for a 2 bed room kitchen apartment ? come on now.

  8. I am looking for house in NCR … and property values are above the sky …. If you say you want to buy 2-3 bhk in 60L dealers gives a look like they are dealing with beggars… And i dont think this is a bubble and its ever going to burst as major part of money involved in property market is black money … more then 60% money is black … bank only give loan on 40% amount which it can recover any time … so no risk for banks … and end user who have to pay blank money have no option .. either buy or go to hell ….

    I wonder does indian govr/ Income Tax Dept does not now about this black money transactions ? if yes they ever going to take any step to stop this ?

  9. No doubt India is one of the fastest real estate market in the world. Being a real estate broker I always updated myself with latest news about real estate in Pune. It is also true that property prices have risen by 284%.

      1. Its very nice to see such a long and healthy discussion on my comment in main article. Thanks Manshu for initiating such a hot topic. I would like to raise few other points :
        1. As a responsible citizen, we have the duties to highlight the positive and negative sides of RE market. As far as Real Estate Market is positive, there are no complaints/regrets from general public. but I am afraid, if any correction happens that would be so deep and will hurt only investors (who bought the property for investment purpose then end users).
        2. I think if a survey is carried out then most of the population will vote in favour of bubble and will not justify the price increase.
        3. I feel that Real Estate prices will decline dramatically. we can take the example of gold price run of 1980 or REal Estate crash in USA/Europe / UAE.
        4. There is very little action from Government to control RE market. There are regulatory authorities in other countries which controls the REmarket but nothing here/ or still under discussion. Properties are now within the reach of very small %age of population. Government only speaks to save big real estate companies but nothing about general public. Its high time to control this uncontrolled market to save general public to fall victim.
        I am very much sure if there is a political will- Real estate market can be brought to realistic level.

  10. Hi Manshu,

    It’s been a long time since anyone replied to this post. So, maybe there are not enough number of people still following the thread, but at the same time, we have a far clearer view of how real estate prices have been actually behaving in the meantime.
    Frankly speaking, in 2012 I was into the same dilemma of whether to buy or not to buy a house. I had some money(hard earned :)) kept aside, which I could invest in either to buy a home or to go for higher study. I was aware of the bubble and so hesitant to take plunge. Unfortunately, global financial job market posed no less dilemma than real estate in India and I basically called of both the decisions.
    In mid 2013, I finally decided to invest and bought a used house that I liked because it had location advantage and great scenic beauty (I am a nature lover).
    Now, fade-up with the current occupation I am 100% sure I will go for higher study in 2016 start. I am under the EMI burden (around 25% house price on loan) but I have never seen even a slight chance of the market normalization in these few years. I mean the bubble continues.
    I would love to know what are your views now about Indian real estate. If anyone find it interesting or want a share any insight, pls comment.

  11. Thanks for sharing thoughts about real estate. If anybody is looking for real estate investment in Pune then visit one of the best project Life Republic developed by Kolte Patil developers located in Hinjewadi, Pune. The project is offering 2/3 BHK flats with price starting from 52 Lacs.

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