Are Indian Property Markets in a bubble?

i read a good post regarding the overvaluation of flat / apartment and land prices in Delhi. The writer Anshu Sharma points out that 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)
  • Now, remember that the median income in Chicago is 50 times more than that of New Delhi. Why Chicago? Because New Delhi can grow in all 4 directions much like Vegas can (and Chicago can in 2 directions) as compared to Manhattan and San Francisco that are geographically restricted.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 (pdf file), and for comparison its $6,000 per acre in California and $8,000 per acre in Florida)

One may argue that Haryana is too close to Delhi. Land in Dehradun is available at only $100,000 per acre while its much cheaper at only $20,000 per acre in villages in Himachal Pradesh. All at prices way higher than Florida or California. Commercial land is even more expensive.

Read his full post here..

In the past three years i have seen prices of suburban flats triple and sometimes quadruple here in Mumbai, a land locked city, which i find shocking , though i know for one there is a huge demand for housing in Mumbai.

Now head to any other city, be it Bangalore, Pune or tier 2 city like Chandighad, Indore etc the prices of flats have also more than doubled and the story is similar, thanks to skewed tax and land laws that give undue powers to politicians.

The main reason attributed to this property boom, is the general decline in interest rates from 12/14 % to 7% , 2 yrs ago and easy money conditions leading to quick home loans.

But the interest rates have started to climb and thanks to the 5 percent differential with the us and the semi dollar peg to the rupee at 49 they are goin back down. But Inflation is going up fast, the Real inflation i mean not the wpi based and fixed figure published by the govt.

Plus the Fm time and again has been putting pressure on the PSU bank MDs necks to cut rates and give more home loans.

Agreed , there is a tech and call centre boom and there are a lot of people earning a lot of money than they ever dreamed, but compared to the housing price rise is this rally sustainable in the near future? That when the first lot of pink slips have already been disbursed by likes of TCS?. Worse the tax holiday for such firms is ending and god knows if it will further be extended.

Oil above 90$ a barrel, upturn in the commodity cycle and prices of food grains the governmental schemes like NREGS and a host of new taxes including Service taxes and VAT and international price rise  has lead to price inflation in prices of commodities and essential goods,vegitables etc

Worse the single focus of all the builders is condos and premium properties aimed at the rich and the NRIs and there is an acute dearth of low cost housing as repeatedly mentioned by none other than Deepak Parekh the man who built HDFC into a home loan giant.

Secondly Rbi is also worried , and has even attempted force the banks to cut the funds allocated to builders or exposure to real estate, as it is clearly worried about asset price inflation including property.

Icici just sold some of their loans to Arcil , read the ii blog.
Ok, maybe we aren’t in a situation half as bad as that of the US and our bankers are far too prudent to get entangled in a sub prime mess , i still think that Indian Property markets are in the overvalued zone, and will start falling in the near future.

No wonder demand for housing loans is falling , thanks to stricter evaluation norms of banks and sky rocketing real estate prices.

Recently while on a train i overheard a conversation between a contractor and his assistant on the property mkts , commenting on an old chawl as we passed from kurla to ghatkopar he said – soon all these will vanish from Mumbai , the big politicians have been investing their funds via the builder lobby (apni do nambarki kamayi yeh builder log ke sath property mein ghusa rahe hai) and using the full force of legislation to get these challs broken down and build big buildings based on TDR.

Just day before yesterday the Fm was again pitching for another rate cuts and cheaper home loans, something which made me wonder – is that interiors contracter right? well maybe he is..

Why ? because neither the forever intervening the central or state govts are doing anything serious to make sure low cost housing is being provided.

What is urgently required is not Condos and luxury apartments or easy home loans but LOW COST HOUSING that is affordable to people, and i don’t mean the poor i mean the middle and lower middle class, people who earn an avg of Rs 10 to 15000- a month are being pushed into either living in far flung suburbs or dilapidated chawls or even slums or taking larger and longer duration loans, to fund their dream house – out of necessity as there is nothing around that is affordable except in far flung suburbs like Mira Rd and Virar or Ghorbandar Rd Thane, where flat prices are now skyrocketing, not greed as in funded applications in the ipo bubble.

This is something the finance minister and minister for urban develpoment should first focus more urgently on as a matter of policy, else there will be a lot more strife and lot more slums and a lot more unrest, and a lot more politicians getting easy reasons to divide people.

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7 thoughts on “Are Indian Property Markets in a bubble?

  1. Alarming !!!

    Started thinking on this directions:
    1. When the real-estate prices are already very high, why FM wants them to go further high????
    2. Bringing down the Home loan rates will not provide shelter to the needy, as he claims to be. Unfortunately, he is also very sure about this fact.
    3. I hope and I pray to god that my dear FM does not have any personal interest in hiking real estate prices….

  2. Very nice post.Now we think, will history be repeated like 1996 when real estate market has seen a blood bath? In the year 1996, when a common man couldn’t afford such higher market price, real estate market’s bubble burst. Bubble; in financial language, any long bull run creates a bubble. If people keep buying any item for a long term, demand remains high and that pushes the price upward. When people stop reacting to such unrealistic higher prices, demand suddenly decreases in the market and that leads to sudden price crash. This is referred as ‘Bubble Burst’.This time, demand is more realistic and very less speculators have entered the market. All the other sectors (Banking, IT, Media, Production houses etc) are also growing. This makes current bull run in real estate looks more healthy and realistic.Once upon a time, it was all six positive signs for the real estate market but now it is a mixed bag. Some factors are still positive but few have turned out to be challenging. Prices have gone up in the past few years. Many people have started thinking that ‘own home’ dream is not possible now. This certainly can decrease demand for the market. What do these indicators suggest? I said earlier that I am not expecting a bubble burst this time but this can be a sign of a slowdown in price rise.

  3. wow rt
    u have a great memory, this bubble is essentially built on easy credit and when the credit dries up and inflation and interest rates dry up, the bubble has to burst , already premium and super premium properties hardly have any takers since last 3 months – that too for properties where target audience is super duper rich.
    Luckily as s aiyar says the black component in prop transactions has saved the market till now
    but i expect a 25% correction to the least by the end of the yr

  4. In India the as there is no transparency in real estate business the nature of bubble is different than the US. The Agent & Media by creating a high supply news quoting exorbitant prices, cause the agent’s commission depends on the underlying asset value. You can seen the promotional activities at ravikarandeekarsblog . Also the media like times of India , running a site like magicbricks who solely depends on builder for advertisement & agent, has to support rising real estate prices. Every time the builders associations comes with a data for housing demand & amp; try to explain
    how there is no bubble. But mere a demand & supply can’t decide the bubble. It can be only explain by the middle class income level & current market price of real estate. In US still there is a demand for housing but the high price level is not supported by the middle class income & that’s why foreclosure’s are happening. Real estate companies has to understand this economic equation else similar market deepening is not far away in India, it’s like killing the hen in crave for all golden eggs in one shot. Currently the Indian real estate companies are conducting a trade show through out the world to attract NRI customers but the fact is that NRIs are already facing a pinch of slowdown in world economy & many of them has lost a job.

    well those are classic symtoms of a bubble , in us there is not only foreclosure due to increase in interest rates on mortgages but the number of houses put on the mkt and left unsold is hitting new records and things wont change at least till the last quarter of the yr
    u have raised a vital point that the sites like magicbricks and cos like times of india are helping the builder lobby through all their expos and large page info advertisements , but remember in the last times prop expo hardly anyone booked any flats , so u see yeh public hai sab janti hai!

  5. Times of India is nothing but a PR newspaper which works hand in hand with the builders in Mumbai. I was so frustrated and angry with its blatant promotion of builder interests that I stopped it and started Hindustan Times. It was like a breeze of fresh air when it came to Mumbai , however I am no longer sure if it has not already been compromised as I only see pro-builder sentiments and views expressed in HT too.

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