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. I think one should buy new 2 bhk house in the range of 30 – 40 lacs in NCR and then sell it in two three years to earn profit in resale . What do you guys say?

  2. Historically average home prices rise at the rate of income. Since India has been growing nominally at 14%pa, so one would expect similar growth in home prices. However, this misses a very important fact – As people become richer the kind of homes they buy also change (bigger/more amenities etc). One should correct for this fact when considering long run home price growth. What one should look for is ‘at what rate do the same house prices grow’. Not surprisingly, wherever long run data is available, same home prices have grown at rate of inflation. See case-schiller index (USA data for 120 years), or the Herengracht index (Amsterdam for 300 years). You will see real home prices for the same homes are flat over the long term. Factor in maintenance/taxes etc, you will likely get a negative real return.

    So ‘Chennai guy’, if your home price has grown much faster than inflation you probably should sell it and lock in the gains. Besides, as ‘RaviTeja’ says until someone steps forward to pay you the amount, it is just a notional figure.

  3. In my humble opinion, people are getting carried away like sheep with no sense at all. They are firmly pegged on the HISTORIC data. People say , I bought a property in 1991 at 2 lacs and now it is 2 crores.

    Investment is about liquidity. Part or full. Even in stock market , you can sell 20% of shares and raise funds if you need. If you have gold , you can sell and raise funds when you need. Mutual funds you can partially liquidate. NOT REAL ESTATE. A property has to be sold wholly. 100%. You have to find a BUYER. This is not some automated process like a D MAT account. Once you sold, you pay capital gains tax else you invest in other properties.

    For personal use, one needs a place. But NOW, in 2012 , it is idiotic to consider REAL ESTATE PROPERTIES as investment. That too in cities.

    Simple logic. Companies are moving out. From Mumbai to Navi Mumbai. From Navi Mumbai to Pune and from Pune to Nagpur. So jobs are moving out . Because cities are become so very expensive that no common man can live there any more.

    And secondly , all these real estate calculations on based on IT sector. How IT people are there in India or abroad ? 5 lac people ? 10 lacs ? How many of them earn over 10 lacs INR / month ? These are all to be considered.

    Apart from IT sector, can any one tell ONE SINGLE industry or vocation which pays more than 10 lacs per annum ? Again banking and finance – miniscule. So what is this propaganda is all about ?

    1 crore property will NEVER EVER EVER become 1.2 crores even in the next 20 years. Economy is supporting this notion. Each time these prices increase, more and more people are going below poverty live. Government will make stricter laws , collect more tax from earnings and so on .

    Do not dump your money in the mad rush – unless you have lot of it and do not care if you lose it. πŸ™‚

  4. Agreed, that in those days $1= Rs 40 today $1=56. but the 25 lakhs flat is now 1.5C. thats why if you buy a plot of land in the low lakhs, the return will be to such an extent that you can buy a flat in a good part within few years (5-10). the 9 lakh land I bought is now at least 1.2 C. thats already 80% of my 15 years old flat, when the price I bought it for was only 35% of my flat in 2000.
    So thats why if you find land for 10-15 lakhs where you pay negligible emi, buy it and wait till it become 1C lakhs by 2020 and then use that to payup for a flat.

    1. I am not certainly arguing here about the dollar , rupee conversion rates. If I may , I was saying , Indian real estate is 6 to 8 time over inflated.

      See, real estate in India is pure speculation. It is worse than stock market. How many people in India will buy a 1.5 crore property ? :). And why would they buy it ? For investment ? For residence ? It is 25000 US$. 250000US$ is considered to be among the rich people even in USA.

      Kindly excuse if I am saying it rudely . But if you put that 1.5 crore property on the block , how many people actually will come forward to buy it ?

      1.5 crore is a LOT OF MONEY . LOT OF MONEY.

      Per capita income increase was really 60% in that time period. Real estate prices grew at 100% Y0Y. That is the reason why the economic collapse is happening.

      See this cycle. Every one wants a property –> Property prices are jacked up –> Employees demand more salaries — > Companies demand more from the clients –> Clients will look for cheaper destinations ( Like Philippines , Taiwan , even HK).

      I live in Mumbai now but I stayed in Chennai for a very long time (Beasant Nagar) and I have seen these speculations.

      Every one owns property and says it costs 1 crore. Now, can he sell that ? Who will buy it ? Howmany people really have earnings worth 1 crore ? even if one has , howmany will have guts to buy a 1.5 crore property ?

      Please accept my apologies in advance if I sounded rude. But I was only putting across a point with my own experience. Even in US where I lived for a very long time costs less than HALF of what it costs here in Mumbai where I stay :). Irony ?

      Now , please compare per capita earning, GDP, economy of the US and India. Does it make any meaning ?

  5. Go for RE. I am 36.I did my comp eng in 96 and went to US is ’98. In 2000 i bought a house on emi in chennai 1700sqft central location for 25L. I took a loan of about 18L and out of 2 years savng i gave 7L. I was only 25 that time and everyone told e i am taking risk etc except my mom who encouraged me. In 2003 my net savings from US was about Rs42L in 5 years and I got laid off and came back to india.I repaid my loan 25+2 yr emi+other charges was 29L. I bought 4800 sq ft of lans in IT highway (again by my mothers envouragemnt) for 9 lakhs. and i had another 5 lakhs in hand which i spent for my sisters wedding (i was 28 now). I started from 0 wit 2 assets. I have been living there for last 12 years. and my salary has gone up to about 30L. I ahve saved most , but i had the flexibilty to spend 3-4 months of sal at a time like when I took myparents and family to europe sightseeing.
    now i have save up about 1C and another 30L in PPF. I am planning to buy another flat near the ECR side for about 80L as investment. I have locked in my FD in my father’s account at 10% and im taking a loan for my new house at 11%. so I ma willnig to pay the extra 1% becuse I know when economy goes up rates will fall. So guys my suggestion is start early, save up by renting, and buy even a small place with what you save. so that wealth yo have locked in.
    never try to take loan and pay by cash.
    eg in chennai buy land in outlying area for about 12-15L by saving up for 2 years.

    Also india will take similar route ofchina. where evreything shot up in the last few years. samething will happen in india by 2018. So just buy what you can and then wait and enjoy.

    1. It is an interesting story. But I think there is a vast difference between the growth story between 96 – 2001 and 2010 and going forward. Indian economy is already stretched way beyond it’s capacity.

      You are one of those fortunate few who made some money when companies were willing to hire Indian work force on H1 VISAs. If you recall , at that times, there were very few people in the field of IT . In the USA almost no one knows about it except the in Burroughs of the silicon valley.

      So most of the growth happened as a result of foreign remittances 1$ = x INR at that time. It is not because of some industrial revolution that happened in India. It was because of ‘body shopping’ or services industry.

      That is history now. H1 Visa’s are almost scrapped. Outsourcing is almost banned in the USA. Europe is going from bad to worse by the day. In 1990s Indian work force was the only competitor for those plush jobs. Now we have competition from everywhere – China, Philippines, Easter European block, Malasia, Hongkong, Taiwan even Srilanka and Bangladesh. Those days are gone for good.

      I have a green card myself and its tough to get a job even in the silicon valley. :).

      In 2012, the economy was growing at a rate of above 6%. Even the prime minister himself tells inflation is going to shoot up.

      It is very difficult to comprehend the notion that ‘economy ‘ would always grow. If that is the case, then European union would have been 1200 times bigger economy than USA. Because Europe is more advanced than the US , less population , more resources, stable governments and very peaceful political system.

      In my opinion , one should invest money in improving skills rather than throwing hard earned money into over inflated real estate in India. Loan rates invariably will shoot up – may be upto 15%. Trust me on that. Indian exchequer does not have cash to lend money.

  6. Last decade was unique for real estate in India. It will be interesting to see whether
    investors can continue make the same gains in metros.
    Renting looks like an attractive choice for average home buyer ( income level 1 lac pm or less ).
    Buying home over 60 Lac Plus would make you stuck in steep EMI , less flexibility and
    poor cash flow for other things in life to enjoy.
    Old adage – “Fools build houses, wise men live in them ( read – Rent )” holds good in this

  7. i am earning 1 lac pm. i have to pay tax of rs. 190000. so i get around 10 lac net means around 85000. now 40percent of 85000 is around 35000. so i can afford emi of 35000. means i can get a loan of max 35 lacs. now in delhi even lig flat costs 60lacs. this equatíon is a complete non sensical

  8. I think the Indian real estate is more like an ugly tumor growing unchecked. There are no fundamentals supporting such an increase in price. Our real estate pundits tend to go by number game. While they say in Brazil , the increase in price is about 20% where as in India it is less than 10%. But Indian real estate prices increased by whopping 800% – 1200% ( 8 – 12 times) in some cities in the last decade. Nowhere else in the world or in the history of mankind such an increase in price happened of ANY commodity. It is worse than speculation.

    The fallout of this all is Indian economy at large. Every commodity costs more these days because of this rabid price rise in real estate because every commodity price is in some way connected to real estate – from rent of a shop through the mortgage. The population increase is at the rate of sat 2% max. urban population increase is say 5%. The demand for housing should have been around that number. But as I mentioned, this is growing like an epidemic.

    Whether or not a crash will happen is a different subject but the real estate is very badly damaging the economy as a whole and helping proliferation of unaccounted money.

    Jobs are moving out to smaller cities. And people parking their monies outside India. Unless some thing is done to check this real estate mania, Indian economy as a whole will be damaged beyond repair and pull us into a deep recession. With 1.5 billion mouths to feed, recession is not an option.

    1. Leave alone a crash, even 1 year of stable (in real terms) RE prices will be a breather. Just imagine, speculation is the highest despite RE being the most high value asset class.

  9. Great article, Manshu! πŸ™‚
    Gives a tiny ray of hope for young people (21) like me… I mean I’ve been wondering how sky-high the land prices might get when I will finally be able to get a home of my own… And yes, after having seen how my parents are still struggling to repay our home loan after 13 long years, I’m certain that it is definitely NOT an investment!!!! It’s more like an emotional, and sometimes fancy, necessity!

    1. There’s no hurry for you to buy a house at 21 I’m sure πŸ™‚ What with jobs and all that, who knows which city you will land in 5 years from now.

  10. Just one word from my side: “CYCLICAL”

    Real Estate is an investment asset-class like stocks, bonds, gold, commodities, etc.
    What matters the most for any class is understanding the cycle, returns are there to be made in any class.

    Also, remember that Real Estate returns are mostly boosted by Leverage; that is how most people make 300% returns in a short time.
    For the 2008-09 investment discussion, I could rant-off a list of A-group stocks that gave more than 400% returns without Leverage.

    End of the day, it’s all about WHEN you invest in WHAT.
    There are always cycles playing out in all asset classes and superseding each other.

    1. Real estate is an alternate investment, and his its own cycle independent of other asset classes. There is always money waiting to be invested; if it does not go into equity , it goes into commodities & real estate. Which explains the never say die spirit returns given by both real estate (in India) and commodities (globally) post 2008-09 meltdown.

  11. Thanks Manshu, good post and some useful comments by other readers.

    I’m all in for a correction but I don’t think it will happen the US way where some of the cities saw housing prices cut to one third of their peak values.

    India is a different story. There might be a correction but it will be a short lived like we had in 2008-09 or may be for couple of years max (unless it is end of the world. .if you know what I mean).

    Few reasons for the same which are not going to change anytime soon:
    1) Developers/politicians lobby, black money etc
    2) Construction and land prices going up
    3) Lot of developers have the capacity to sit on unsold stock for a long time
    4) There will always be family pressure (if not peer) to buy your own home eventually
    5) There will always be family and peer pressure to invest in RE as most of the regular folks don’t make money in stocks/MFs and find fixed income not attractive enough

    With that said, let’s hope the correction happens soon so that the common folks are able to get in. But the problem is their mindset, assuming a correction of 10% happens. They will wait and expect the prices to fall further, eventually miss the boat again.

    Like always, it is a tough choice.:-)


    1. I agree with you that correction will be temporary like 2008-09 and not full blown like US. Remember the old terms “Zameen -Zaidaat”; its worshipped in India, ppl here cant think it can go wrong. As developers get stuck to inventory, they will not complete projects, supply of ready to move houses will remain low and hence prices will still remain high. In either ways, the end user will suffer, not the investors (investor has already played the game of leveraging/margin money at the cost of both end user and developer).

      1. No wonder developer’s share prices are at all time lows, while investors have pocketed all the gains. The poor end user is left nowhere to go other than complaining at blogs/post like these.

  12. As per a CIBIL study, more than 1/3rd home loans sanctioned in 2011 were by borrowers below 35 years of age. Which shows people have started buying homes earlier than lets say a decade back.

  13. I remember the same discussion a year before in OneMint. I am seeing more people now favouring not going for a house. Its a very hard decision to make. But I think Japan and US situation cannot be applied to India.One thing which works in favour of realty guys in India, the land is less and population huge so the market for houses is always there.
    Is there a bubble? Doubt it. US has been through 2 cycles of housing bubble we haven’t see even on yet.
    Another reason the bubble may not burst is lot of our politicians are heavily invested in real estate and they will do their best to keep their assets at good value.

    1. @Harinee,

      The land was less and population was high ( relatively ) in Japan when the crash happened.

      But yes, a crash like in US or Japan may never happen here because of the involvement of politicians and the amount of black-money in real estate.

      1. The land area per person would be much lower (or rather population density is much much higher in India ~10 times of US), so is our bubble bigger than USA?. Another factor,
        – if we only go by land availability, real estate prices should rise only at rate of population growth. But thats not the case since per capita income and it’s growth play an important role.

        An interesting calculation, Llyod’s TSB number of 284% increase over 10 years only amounts to CAGR of 14.4%, which is not all that high as its made out to be. By the way, hasnt our nominal GDP growth been near to 14% (7% real growth + 7% inflation) in the past decade?

        Of course we see that real estate prices have grown at greater than 14% p.a. in many regions, which is why location specific analysis is far more important than giving blanket general statements like “Indian real estate bubble”. Real estate as an asset class has low systematic risk and high idiosyncratic risk component; therefore discussion about individual micromarket bubbles is the only way out.

  14. Here we need to differentiate based on location, Bubbles are in Delhi NCR and Mumbai Region. There is a lot of speculation in North India. South Indian cities like Hyderabad and Bangalore, are still reasonably priced and offer good value (specially for end users). Secondly, rising prices are shifting rent vs buy decision, heavily in favor of rent. Eg, staying in a 1 crore property in gurgaon, one can get at 25,000 pm rent (assuming 3% rental yield). Same property, if one has to buy on loan, its straight away atleast 80,000 EMI + invest your 20 lac savings. Further, staying on rent is always a flexible decision, as you may even have to shift a job to other city, your switching costs are low.

    From an investment perspective, we should realise the super-normal returns on offer in construction linked properties. Assuming you paid installments upto 25% of property value and sell in 1 year, if property appreciates by 30%, your gain is 30%/25%= 120%. I know people who invested in Gurgaon at the bottom of RE cycle in 2009-10 and are sitting on gains of 300% (even though basic market rate increased by 100%). They have only 1 thing to say “Talks of bubble bursting in RE are foul cry by those who missed the bus”

    1. I can appreciate why someone who made money will poke fun at others, this is not the first time it has happened. It’s been going on for centuries across countries, ultimately people need to do what feels right to them.

    2. If somebody had invested during the downturn of 2008-09, then he/she deserves the returns they got, since they took a great risk !!

      At the same time, I can’t help but wonder if these people are the “normal” salary earning middle-class. Because a normal salary earning would not have had the guts ( fear of layoffs ) nor money ( no bonuses/ salary cuts) to invest in RE during 2008.More likely it would have been black-money that got invested.

      And that brings me to the next point: In India most of the RE money is black money and that will keep the prices high, and we may never see the type of crashes as in US or Japan.

      1. These are good salary earning people who have one house (basically people belonging to Delhi, living in family inherited home ) who have got these returns. Someone booked a 60 lac house, has paid 25-30 lacs installments till date in white, which is not a big deal. Booking this kind of appartment, you dont need to be a 50lac-1 crore salary person. If both husband -wife are MBA & working earning decent salary, you can get a moderate loan sanctioned and go for it, ultimately you did not even need the loan (coz of payments to be made over 4-5 years)!!!!. Black money has got nothing to do with this example as original bookings are done in white only. Black money is only exchanged in resale deals, which anyways follow (and mostly at discount to) the original booking prices. Lets give credit to people who started early in real estate, even if current prices are a bubble, they would have made decent gains even half way through.

        1. Ankur,

          Then, as I said these, people deserve the returns that they got and I do not grudge them. If a husband-wife MBA types bought a flat during the 2008-09 downturn, when their own jobs/salary was at risk, then I salute their risk-taking ability.

          1. I dont think we were ever in a Greece like situation that job/salary was at risk. Atleast not all professions were at risk. Fom my experience, real estate investors in Gurgaon, a major chunk i.e. 40-50% are well placed working professionals, who are able to rotate their gains.

  15. frankly a good not posche, decent plac will cost 20% of sallery in rent πŸ˜€ funny isinit.

  16. Rented place at place of work while securing house in or near native / new developing area of city can be one option for people who paying 75pc salary to baunk.

  17. @bemoneyaware: thanks, I understand that it has to be 50%, but the city i live in i cant get a house for that rate and prizes have been going crazy, i have been thinking that this would end and this would end and prices will fall but it didn’t and i lost 4 to 5 years just thinking that it will fall, i have a family now and now i have started thinking if i dont take the risk now when will i, but again i think 75% or even 50% of my salery for 50 years is hugeeeeee and what happened if something goes wrong, there is another recession or i loose my job or so on.. you see i am very fearful and confused.

    some points that keeps popping out in my mind, if i but a house , how would i continue investing for my long term goals like childreen education?, my retirement and so on,

        1. I’m about the same age and frankly, I can’t see myself making such a long term commitment straining all my resources to buy a house when I’m not sure which city I will end up in 5 years from now, let alone 30 years from now.

          This is a very personal decision though, as you have yourself said earlier, so do what seems right to you.

    1. Good lesson for others. Be fearful, confused before you make such “investment” so that you can do some research and do sums before taking the plunge.

      Sorry Vikrant, not trying to criticize you here but that just doesn’t seem/sound right.

    2. Suggestion: Try to reduce your debt by repaying early if you can.
      If you have any other asset such as ancestral home, land in your hometown, sell it off to repay.
      Or sell off your new property, pay of the debt and buy the property that you can repay the homeloan without fearing for your life. There is not shame in it.

  18. Manshu,

    do you have the same feeling if one buys a house for living, and not for investment, My point is if i need a buy a house for living in it and not really for investment, keeping in mind that i would be paying around 75% of my sallery as EMI for next 20 years does that not make sense? both me and my wife are working?

    One more point for me house is a emotional thing and not really a investment.

    1. Rightly said “house is a emotional thing and not really a investment.” Typically EMI should be around 50% your salary. If you feel burden of EMI and it is causing stress for 20 years – you need to consider is it worth it? Are you buying the house because you are succumbing to parents, siblings, peer pressure .
      I have seen people buying house at far off places, commuting to their place of work and paying through nose for the EMI.

      1. Is this a typo or do you really mean 75% of salary? Doesn’t that mean tax is paid with the rest of it? What’s left for everything else?

        1. didnt quite get your question regrading TAX paid, but yes buying ahouse is very expensive and it would cost me 75% of my monthly sallery as EMI

          1. What I meant was most people pay about 20 – 30% of their salary in taxes, and if you are paying 75% in the EMI, isn’t the rest being used up in paying income tax.

            1. oh okie, I said that post tax, because tax is already deducted for people like us, we dont have a option πŸ™‚

                1. No. It’s not Okay.

                  It might be okay that it was clarified that 75% was from post tax salary, but seriously 75%?

                  Would I be happy that 75% of my money is going for the welfare of builders and bankers?

                  Would I not be worried if in case of a job loss, I won’t be able to pay the mortgage for more than couple of months?

                  Would I be willing live a substandard (relative term – according to the income) life with just 25% of net salary left to pay for everything else?
                  i.e. food, health, education, insurance, maintenance, car, holiday, festivals, entertainment.

                    1. There is always a way. Take a small step first.

                      If your aim is to own a decent 2 BHK apartment but you do not have enough funds or capacity to pay EMI, then start with buying 1 BHK to take a step on the property ladder.
                      When and if you have raised sufficient funds later in few years and your repayment capacity has become better than before, sell your 1BHK and buy 2BHK.

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