Real Estate in India in a Bubble?

Is India in a real estate bubble?


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#23
Rs.44,00,000/$2,60,000 = 16.9 (based on the ratio of the price of house in Thane to the price of house in Edison as quoted earlier in this thread)

Interesting how close this value is to the Purchasing Power Parity (PPP) of India used to calculate GDP on PPP basis by the IMF (2009)! The value is approximately 16.7.

PPP is based on a basket of services (food, clothing, shelter,etc.) and mostly applicable to goods and services produced and sold locally. So either all goods and services are in a bubble at 16.7 or nothing is in a bubble. Unless the housing PPP runs up by itself to twice or thrice the average PPP, I think we are fine.
 
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#25
That $260,000 is the price of a separate bungalow or an apartment?
I suppose by definition it would mean "a preferred middle class abode".

I don't think a middle class American can afford a 2-BHK apartment in NYC anymore than a middle class Indian can afford a bungalow in Mumbai. So the Americans move to the suburbs to find a bungalow (house) and the Indians move to the suburbs and find an apartment.
 
#26
That $260,000 is the price of a separate bungalow or an apartment?
The locations are comparable. Thane is a suburb of Mumbai where middle-class people stay (or rather used to stay).

Edison is a suburb of the NY Metro area where middle-class people stay.

The properties themselves NOT comparable.

The property in Edison is a row house with front and back lawns and garage. Post 15 in thread has a link to the listing that has photos and other details.

The 1BHK in Thane has to be in a apratment building. There is no way you are getting a row house there for 44L.
 

Alchemist

Administrator
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#27
I suppose by definition it would mean "a preferred middle class abode".

I don't think a middle class American can afford a 2-BHK apartment in NYC anymore than a middle class Indian can afford a bungalow in Mumbai. So the Americans move to the suburbs to find a bungalow (house) and the Indians move to the suburbs and find an apartment.
Then we are are comparing apples with oranges.

Comparisons have to be made between similar samples.

Most Americans can afford cars. In India, two-wheelers are much more common.

A car is US costs $10000.
A two wheeler in India costs Rs 50000.

Rs 50000/$10000 = 5, which is less 16.7.

Thus, automobiles in India cost only 30% of what they cost in US.
Does the above make any sense?
 
#28
Then we are are comparing apples with oranges.

Comparisons have to be made between similar samples.

Does the above make any sense?
Like you said in your earlier post "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"

PPP is based on a basket of services (food, clothing, shelter,etc.) and mostly applicable to goods and services produced and sold locally.
Does Japan dump its cars in the US?
 
#29
I understand the point you are trying to make but you need to at least use a better example to support your argument. Automobiles is probably the worst example behind electronics.

I can think of many examples that support my conclusions (e.g. Barber, cost of a mid-day meal, etc.) and also examples that run counter to my argument (e.g. Access to tuition in India and in the US, Cost of a college degree in India versus US, Means of local entertainment for Japanese and Indian teenage girls, access to sporting infrastructure in India and Australia).

Neither proves nor disproves the applicability of PPP to compare standards of living across geographies.
 

Alchemist

Administrator
Staff member
#30
I understand the point you are trying to make but you need to at least use a better example to support your argument. Automobiles is probably the worst example behind electronics.

I can think of many examples that support my conclusions (e.g. Barber, cost of a mid-day meal, etc.) and also examples that run counter to my argument (e.g. Access to tuition in India and in the US, Cost of a college degree in India versus US, Means of local entertainment for Japanese and Indian teenage girls, access to sporting infrastructure in India and Australia).

Neither proves nor disproves the applicability of PPP to compare standards of living across geographies.
I agree that 44,000,000 rupees may be same as $260,000 if one considers PPP.

My point is that for the same PPP-adjusted money, a person gets an inferior product (apartment) in India compared to what he gets in the US (separate house).

In US, the person gets the home as well as complete ownership of the land.

In India, for the same amount of money (PPP adjusted), he gets the home, but only a part of the land.

This difference arises because land is very expensive in urban India.
 

Atiker

Active member
#31
Lets leave a PPP of 16 aside and take a different approach.

Compare the living standard of a person doing a job X in India and the same job X in US of A.
From the earning in the local currency for the same job what can s/he afford ?

Compare an american hair stylist to an Indian Billu Barber, can the later think of living in a pucca house ? Both cut hairs.

Compare an american shop help (one who arranges clothes or stands at the cash counter) in Walmart to the one in Big Bazaar or Shoppers Stop. What both of them can afford in their own country ?

I have seen a house-help in New Jersey come in a Car. Ok I agree Car is not luxury in US of A, but compare the model and condition of her car with what a regular IT/BPO guy can afford in India. I guess pay in IT/BPO is more than that of other sectors in India.

I had a friendly talk with a cabbie in USA. According to him,he had a "tough" life as he used to drive 12 hrs a day because he had to feed 4 kids and pay mortgage of 3BHK bungalow with a big lawn. Oh yes he used to earn a "meagre" $8,000 a month. What can a Mumbai driver expect to live like ? Can he even afford a covered toilet ?

Lets leave Bombay and New York.

Now I am comparing salary of a sector considered good by Indians - IT/Software, which is considered a bad one to be in by Americans. IT/Software is a field no smart american youth will want to join. (Indian youths are also getting enlightened)

How much a competent IT guy in India earns.. say 6 Lakhs. How much an entry level software engg in USA earn ? A minimum $60,000 which is equal to 30 Lakhs. Almost 5 times.

Whats the cost of bungalow in Atlanta ? $300,000 it comes out to be Rs 1.5 crore. One-Fifth of 1.5 crore is 30 lakhs. What can you get in 30 lakhs in Hyderabad where the real estates has yet not recovered, not even a 2BHK. The affordability in any of the other Indian IT city is worse.

The above comparison is between the better of India with the worse of America. If you compare the top 10% of american school going kids with the top 10% of Indian school going kids, the affordability after school for the former is much better than that of the later.

The two major problems in India are

1. Scarcity of regulated/zoned land and menace of hoarding There is a dearth of regulated land in India. Most of the land is either in dispute or hoarded. When the municipality/housing-development-board sells a land for housing purpose, why is the buyer not forced to create a dwelling within a stipulated time ? Why is the buyer allowed to sit on it for 20-30 years ? The primary purpose of sale by the government is to enable people to build and live, then why allow hoarding? Force buyer to build within a 5 year period else acquire it back.

2. Terrible Infrastructure
In USA people have no qualms in travelling 50+ miles(80+kms) a day to reach their office. Why ? Simple traffic is not terrible or the public mode of transport is comfortable.
Lets leave south bombay aside as it is a different ball game just like San Francisco and Manhattan NewYork.
I used to stay in Kandivalli and work in Andheri, the average travel time for a distance of 13km(<8miles) was 1hr in the morning and 2+ hours in the evening. Apart from wastage of time, the pollution and heat used to kill me. If it took the same time and was convenient to commute between office in andheri and home around 80km away why the hell would i prefer to live near office ? The undue premium for near places will go down.

I am confident that if the above two are resolved the cost of dwelling will come down to half if not one-third of what it is now.

So the question is, is there a Real Estate Bubble in India ?
Answer is yes and no.

Yes if the govt can clean up the mess and give boost to infrastructure.
But will the government do that ? First of all what is government ? It is the babus and the politicians. Both of whom's interest is in sustaining high real estate prices. In every city in India politicians have a stake in big residential projects or the politicians and their relatives themselves are the builders. For corrupt babus real estate is the place to invest black money. It is a simple case of conflict of interest.

There is one scenario when the prices can crash, during a major economic crash. It could have happened in 2008 but then the government bailed out the builders by "facilitating" government banks to provide loans, when none of the private sector banks were interested in bailing out the real estate "developers".

So in my opinion the answer is a big NO. The prices may come down 10-15% but in the long term it is bound to go up, unless we get good politicians, a near impossibility.

I don't call it a bubble, I call it a problem with the system.
 
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#32
In an attempt to mitigate the sky-rocketing housing prices in Mumbai/Thane, I did a survey of the housing in Pune this weekend.

The Pune / Pimpri-Chinchwad area is undergoing a housing boom. If you move out of the heart of old Pune city, you can see new development almost everywhere. Six months ago my friend booked a house in a new complex at Pimple Saudagar at Rs. 3300 p.s.f. The current rate is Rs. 3900 p.s.f. This is a rise of 18% in six months.

I visited around 6 new complexes and the story was the same. Prices are up 15-25% in the past six months. Almost all the houses in the complexes are bought by people working in the IT sector. Almost all the sold houses in new complexes are rented out to youngsters working in IT. Just a handful of houses seem to be self-occupied by families.

I concluded that buying a house in Mumbai / Thane is a better bet as the housing in Pune seem to be solely dependent on demand from the IT sector. And also because I got a sense that the demand in Pune is largely from investors.

Caveat: This is gut-feel from a 1 day survey. Please apply the necessary pinch of salt.
 
#34
Note: Can't add more to your reputation :).
I am facing the same issue. I would like to appreciate many excellent recent posts but when I try to give reputation I get a message saying "You must spread it around before giving it again".

I guess that is why Alchemist's reputation is stuck at 10.
 
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#35
Here is an article in the Economic times on the possible after-effects of the Loan scam.

Two things sentences I particularly liked (and hope come true soon):

An unintended consequence of the scandal could be lower prices for home buyers as developers look to sell at a faster rate to improve cash flows.
"This issue, along with tighter measures already announced by RBI in its policy review, may expedite the process of correction,” he said, estimating the correction to be at least 25%.
25% is a good start. I could do with more, and about time the bubble started deflating. :D.
 
#37
Two interesting pieces of data:

The per capita annual income of Mumbai for 2009-2010 was Rs. 1,25,000. [Source]. Assuming 10% increase, the current per capita income could be around Rs 1,40,000 per annum.

A recent survey by a local mumbai daily of housing projects indicates that the minimum price was Rs. 46,00,000 for a 1 BHK flat that is not too conveniently located. [Source]

So even a "not so desirable" flat is close to 33 times the annual average income in the city.
 
#39
Six months ago I had visited a very large housing project near Pune. At that time the sales-people had a "take it or leave it attitude".

I hear that now they have become very customer friendly and the developers are offering loans at flat interest rates of 7.77%.

I hope that this is a sign of builders getting worried of their ability to sell at current prices and that the next step is lowering of housing prices.
 
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