Real Estate in India in a Bubble?

Is India in a real estate bubble?


  • Total voters
    0
#1
Yesterday my brother attended the "opening" ceremony of a housing project in Thane (neighbouring city of Mumbai). Around the Mumbai region, Thane has the fastest growing real estate market with most growth concentrated on Ghodbunder Road.

The remarkable feature of this new project was that the location is far far away from the city center. Across the road the neighboring housing complex sells at Rs 2600 per sq ft whereas the new one proposes Rs 4500 per sq ft.

A thought immediately hit me: Are we in a bubble? Rs 4500 per sq.ft at a location where it would have been unthinkable to live at a couple of years ago?

Members, please give your opinion.
 

Alchemist

Administrator
Staff member
#2
In the long-term, I am very bullish on real estate in India.

I mean real estate prices and not real estate companies.

The reason is very very simple.

India is a land-deficient country.

It is actually one of most densely populated countries in the world.

Today, around 30 crore people live in and around urban areas.

By 2050, India's total population is expected to touch 180 crore and urban population may reach 90 crore.

This means for every 1 home that is available in urban India, 2 more need to be constructed in next 40 years.

=================================

Even tough the long-term trend in real estate prices will be up, there may be intermediate corrections every few years.

These may last 1-2 years or even more - depending on the individual market.

=================================

The performance of real estate companies will differ.

Most of these companies are using leverage to achieve a higher return on equity.

They borrow at 10%-12%-15% and then hope that they will get a higher return from their investments.

If the real estate markets don't behave as the companies expect them to, the financials of real estate companies may worsen dramatically. We have already seen this happening with companies like Unitech.

The best way to invest in real estate stocks is to buy in a downturn and make a basket of stocks.
 

Alchemist

Administrator
Staff member
#4
Alchemist,

What is your short-term view 2-3 years on urban real estate?

Regards,
Sudhanshu
I can't make a general call.

Prices in different markets can go in different direction.

Just like in stock markets, a mini bubble had developed in many real estate markets in 2003-2007. There still is a lot of unsold property with builders/investors and this may keep the markets flat for another 1-2 years.

Again I repeat that one has to look at each market in isolation and it is not necessary that what is happening in one market/city, should happen in other markets/cities.
 

man4urheart

Well-known member
#5
Yesterday my brother attended the "opening" ceremony of a housing project in Thane (neighbouring city of Mumbai). Around the Mumbai region, Thane has the fastest growing real estate market with most growth concentrated on Ghodbunder Road.

The remarkable feature of this new project was that the location is far far away from the city center. Across the road the neighboring housing complex sells at Rs 2600 per sq ft whereas the new one proposes Rs 4500 per sq ft.

A thought immediately hit me: Are we in a bubble? Rs 4500 per sq.ft at a location where it would have been unthinkable to live at a couple of years ago?

Members, please give your opinion.
Which builder is that?

Hiranandani on Ghodbunder road rate was 4500/- 4 months back....that too half of its building are marked on forest land and is under dispute.
 
#7
China is already in a bubble like situation and is likely to burst soon. So too in India, many realty cos have gone out on an expansion spree, without much demand,

Recent hike in CRR, could trigger a interest rate hike. HDFC chairman has warned most of the developers, regarding this.
Already asset prices have gone up 30/50/100 times depending upon the region. Not much appreciation expected from here.
 
#8
To prod further on this topic - Who are the stronger players of this game ...I mean who don't have leveraged balance sheet and are conservative in approach.

If we assume that US will be in double dip recession and Indian growth story also take severe hit because of that ...which domestic players will be strong enough to rely on internal accruals to tide the storm ?
 

vasa1

Well-known member
#9
Moneycontrol doesn't seem to have a category "Real Estate"! :dontknow:

They have:
Construction & Contracting - Civil
Construction & Contracting - Housing
Construction & Contracting - Real Estate

So you can using "debt" as a criterion if you wish and then sort by % of liability.

My exposure to this sector is via Mahindra Lifespace which falls in C&C - Civil according to Moneycontrol. It is a whopping 1.8% of my holdings.
 
#10
Yesterday my brother attended the "opening" ceremony of a housing project in Thane (neighbouring city of Mumbai). Around the Mumbai region, Thane has the fastest growing real estate market with most growth concentrated on Ghodbunder Road.

The remarkable feature of this new project was that the location is far far away from the city center. Across the road the neighboring housing complex sells at Rs 2600 per sq ft whereas the new one proposes Rs 4500 per sq ft.

A thought immediately hit me: Are we in a bubble? Rs 4500 per sq.ft at a location where it would have been unthinkable to live at a couple of years ago?

Members, please give your opinion.
The housing complex that sold at Rs 2600 per sq ft as mentioned earlier is now Rs 3200 per sq ft. That's up 25% in 7 months.

The complex is located far away on the outermost edge of Thane city on Ghodbunder road. People who don't know about Mumbai / Thane may consider this as the outskirt of the Mumbai Metropolitan Region.

Who is creating this demand that has caused prices at the most remote projects to go up 25% in such a short time?

@ Rs3200, a small 850 Sq ft 2 BHK costs Rs. 27.2L. Adding registration, parking etc it probably comes to around Rs. 29L. The EMI for the buyer probably comes close to Rs 27500 per month.

India is a young country and we are bound to have good demand for housing. But the people who can afford to pay Rs 27500 EMI are a minute percentage of the population. Could these minority of people sustain such high prices?
 
#11
It's all cartel between promoters/brokers/ govt officials/politicians.

Actually there isn't much demand. Initially the promoters create artificial demand and later it is desperate buying by the general public.
 
#12
China property buuble

Hi All,

China has 64.5 million (6.45 crore) empty houses in urban cities. (total wasting of resources). Living space for 20 crore people (3 people per house).

http://www.hindustantimes.com/China...ty-bubble-a-threat-paper/Article1-569588.aspx

Now China population is 132 Cr.

Let us be optimist and say 3% (figure taken from wikipedia) people migrate to urban areas in China.

Total migrants=4.5 crore.

Demand = 4.5 crore people.

Supply = 20 crore people + Additional Houses Constructed every year.

Nobody can stop the bubble to burst. Isn't it?

One more thing If it it bursts then Cement and Steel industry will be highly impacted because china's capacity to produce cement and steel is much larger than any country in the world. This may lead to drastic price reduction in cement and steel in other countries too including india.

Now the real estate will get impacted.

Comments are welcome.
 

Alchemist

Administrator
Staff member
#14
Supply = 20 crore people + Additional Houses Constructed every year.

Nobody can stop the bubble to burst. Isn't it?

One more thing If it it bursts then Cement and Steel industry will be highly impacted because china's capacity to produce cement and steel is much larger than any country in the world. This may lead to drastic price reduction in cement and steel in other countries too including India.
There is definitely a real estate bubble in China. Even the Chinese government knows this and has taken steps to cool down the sector.

No one can really say when this bubble will burst, but it will happen sooner or later.

A real estate slowdown in China will surely impact the steel industry. Steel is a global commodity and excess supply in one part of the world can soften prices in other parts of the world too.

I don't see any direct impact of such a bubble burst for either Indian real estate or Indian cement industry.

Both real estate and cement are governed by local factors. If there is excess demand in China, China can't dump its real estate in India.

Similarly, cement can't be transported over long distances without incurring significant transportation costs. That's the main reason why cements prices vary significantly in different parts of India.

(India's cement industry is currently facing a problem of oversupply and FY 2011 is expected to be a weak year for the cement industry).

If a slowdown in the Chinese economy also leads to a slowdown in the Indian economy, we will definitely see softening of both real estate and cement prices.
 
#15
An interesting comparison between India and US real estate.

India FY10 per capita income (yearly) = Rs 44,345 [Source: Economic Times]

US FY09 per capita income (yearly) = $44,495 [Source: Wikipedia]

I am trying to compare prices of real estate with similar attributes in both countries with the respective per capita income.

The attributes chosen are:
1. House in suburb of Major financial center (around 30-40 minutes train ride)
2. New construction
3. Modern amenities: Gym, pool etc
4. Prefered residential destination for office goers

By this criteria I have chosen to compare Thane City (as suburb of Mumbai) and Edison, NJ (as suburb of NY City). I have stayed at both places and found the similarity very striking.

A 2 bed 2 bath house in good locality and good amenities is available in Edison for $260,000 [Source]. Thus in the US a good house is available in a good locality near a major city for slightly less than 6 times the national per capita yearly income.

6 times the Indian per capita yearly income is slightly less than 2.67 lakhs. For that amount you won't even get house in a slum area in Thane.

My thoughts:

1. Real estate in India in and around cities is overpriced. Almost like a bubble.
2. India has a large population and has real demand for housing. But the demand is likely to be for affordable housing probably in Tier II or III cities.
 
Last edited:

Atiker

Active member
#17
An interesting comparison between India and US real estate ...
I too used to think along the lines that you said. And I am also not denying that real estate prices are overvalued.

But there is a flaw in your argument.

The price of residential property is not only a factor of the earning or say per capita income.
There are other variables independent of per capita income, which determine the price.

1. Raw material used for construction - ( e.g steel price would be similar here as well as there.)

2. Cost of human labor (Yes it's more in USA, but they have reduced the human intervention to bare minimum)

3. Inflation, US there is no inflation, in India because of inflation people strongly believe that prices of everything will go up so better to buy now, even at a premium.

4. Huge scarcity of regulated land in India.

5. Terrible state of transport - This gives a premium to residential area near to workplace. (Many years back my office was in Andheri and I used to stay in Kandivalli - for a distance of 10 km on western express highway and 3km JVLR Jogeshwari Vikhroli Link Road, it used to take me more than one hour in the morning to reach office and 2 to 3 to even 4 hours to reach home in the evening, I had been stuck in traffic jam at midnight too, Now don't compare traffic jam of USA with what we face here)

6. Attachment to residence - In old age, even well to do Americans sell off their big houses and move to smaller one to spend the difference. There is no such supply here.

7. Black Money - Here its a place to put Black money.
 
Last edited:

Alchemist

Administrator
Staff member
#18
The price of residential property is not only a factor of the earning or say per capita income.

There are other variables independent of per capita income, which determine the price.
I would like to add a bit:

The raw materials used in houses in US are very different from what we use in India.

The use of cement and steel in US homes is much less compared to Indian homes. Americans use more of wood and other synthetic materials to keep costs low.

See this article on how homes are constructed in US.

Also, US has much more land than India.

India's population density is 360 persons/sq. km.

USA's population density is 32 persons/sq. km.

For every sq. km of land, there are 11 times more people in India compared to USA.

As there is much greater competition among buyers, the relative prices in India are much higher.
 
#19
Atiker & Alchemist, I agree that there are factors that must determine why realty prices in India are what they are. I just wanted to highlight the fact that houses are nearly unaffordable for the common man earning close to the per-capita income while in the US it is possible for people earning the per-capita income to own a reasonable house.

After the analysis I also understand why we have slums spreading on every piece of available land: that is the only options left for most people.
 
#20
Yesterday's DNA newspaper had a article on housing [Link].

Prakash Shah: I don't see a price correction happening in distant suburbs like Thane where the price is about Rs8,000. That is affordable middle-class housing.
The minimal a middle-class family yearns for would be a 550 sq.ft 1 BHK. At the quoted price of Rs 8K that comes to Rs 44 lakhs.

The interesting conclusions:
- A 1 BHK house in a supposedly middle-class locality is called "Affordable".
- People who can afford a Rs. 44 lakhs house are called "Middle Class" now.

Quick math:
Assuming 20% down-payment the loan amount comes to 35.2 Lakhs.
EMI for 15 yrs @ 9% comes to Rs 35702.
To have that much disposable income post tax, it is safe to assume that the person must be earning a salary of at least 10 Lakhs (gross) per annum.
 
Top