Indian property bubble

From Wikipedia, the free encyclopedia

A major office complex in Gurgaon

Tidel Park is one of the many software parks in Chennai.

The Indian property bubble Some Indian economists ^{[citation needed]} have expressed concerns that housing markets in some major Indian cities may be property bubbles and are expected to burst . The primary causes triggering bursting of this currently hypothetical bubble would include political instability in the country, restrictions on banking exposure to this segment of the economy by the Reserve Bank of India . This will likely be in an attempt to prevent the sort of massive housing price crash that occurred during the fall of United States property bubble of 2008-2009, but it may have the opposite effect, speeding up losses.

Background

Potential causes

The Indian property market is purported to be in bubble territory since March 2005,. when the current UPA government decided to liberalize foreign direct investment norms in real estate on Feb 26, 2005,^{[citation needed]} introduced the SEZ Act in 2005, and allowed private equity funds into real estate. Other key factors that contributed to this tremendous growth were ‘lower price’ ^{[citation needed]}which attracted buyers and investors not only from India but NRIs & Foreign funds also deployed money into Indian real estate market. These new rules ensured that Indian money stacked in Switzerland and other tax havens can be brought back to invest in high yielding Indian property market,^{[citation needed]} away from low-yielding dollar assets.

Debate

Arguments against the bubble

Some have suggested that given India's population density is closer to that of Europe than that of America the real value of Indian Real Estate should be close to European levels rather than American levels. When looked at in that way Indian real estate is still cheap. This argument assumes the rapid economic growth in India will have brought per capita income in India to Western European levels within the next 10 years in urban areas.

By its very definition, a bubble is a short term phenomenon while Indian real estate market has continued on a secular upward trend, apart from periodic adjustments, in the last 10 years. Bear in mind that there are almost 400 million Indians waiting to hit the middle class group and they will exert additional pressure on the system. Affordability is the most important factor when it comes to housing prices and middle class housing is much levels of affordability in most of the major cities in India. People who compare India with developed European cities, forget the huge difference in affordability in both areas. Of course there is a huge demand for housing but they can only buy what they can afford(from common sense).

One of the big problem of real-estate market is that supply lags behind demand by about 5 years (Plan-Approve-Finance-Construct time).^{[citation needed]}

Lack of efficient signals to market participants means that there will be periods of mismatch between suppliers and buyers hence leading to cycles of booms and busts.

Arguments for the bubble

Contrary argument to this is US prices should ideally move with economy/inflation rate of 2–3% while Indian prices will gallop at the rate of 10% a year and probably more as the land distribution market is inefficient. This price increase is mostly due to two reason – one primarily in most cases the developers create false claims of overbooking and increase the demand and price^{[citation needed]} and the other reason most of time properties are bought sold within 6–12 months from one buyer to other. There is no system available to the public to track these sells or buys. In US there are lot of real estate website provide the details buy and sell details, what is fair value, when the house was built, how many houses are on sale.
World standards for rental yields are 5% a year of the Total Cost of the Property. Also, affordability starts at 2x annual household income and as far as rental its no more than 20% of your monthly net income. Lets work out the statistics for India with an example. Apartment Cost = 50L. Rental for that same property = Rs 8000 per month. Tenants Household income = Rs40000 per month. What is the actual cost of the apartment according to world indices and whats the bubble. 5%^{[citation needed]} of 50L = 2.5L/year or Rs 20833 per month. Bubble amount = Rs 20833-Rs 8000 = 12833 * 95% = Around 30L. Roughly Indian real estate bubble is about 50-60%. This property cannot and should not cost over 20-25L at max. Lets look at from the affordability standpoint against household income. Rs 40000*12 = 4.8L * 2x or 3x = No more than 15L.
Other interesting facts to note is that India only has a 3% tax base and 70% of the population lives with a household income of no more than Rs 100 a day. The aspiring middle class which is 20% of the population lives with a household income of Rs 1000 a day and upper middle class at 3000 a day. Lets not worry about the rest, who are rich, super rich and ultra super rich.
Indian real estate is a classic bubble of inflation, stagflation and concentrated wealth with a few and unsustainable. The crash is projected to be inevitable by major renowned economists in the world and the consequences can be devastating to all. Indian real estate including builders, brokers etc. continue to sell the dreams to the public and many of them are defaulting.^{[citation needed]}

Possible timing of adverse market events

Abnormal market statistics in the year 2011

Property market is predicted to witness a glut in 2012–13 owing to steady new launches at a time when sales are extremely slow, according to Indian real estate consultancy Jones Lang LaSalle^[1] India as reported on Navyroof.com.^[2]

As of April 7, 2011, Navyroof.com.^[3] featured an article Mumbai residential property set for fall of up to 35% by Jones La LaSalle which says property in Delhi and Mumbai could fall by as much as 35%. The reasons for this is Indian property developers who bought land at high prices are now having to bring prices down considerably and of recent residential sales about 65% of flats in Delhi and 35% in Mumbai have gone to speculators according to Jones Lang La Salle. Another article dated June 24, 2013, suggests that slow down has already started in some areas.^[4]

Some Delhi commentators, such as Prerna Agarwal,^[5] feel the Indian property market needs to be looked at in context of the overall economic situation in India and the local real estate pricing trends prevalent in a region. The Indian economy is booming with an annual GDP growth rate of 8.5- 9% creating a class of potential investors with significant disposable income. As housing remains a concern in major metro cities, sufficient demand generators for residential units are there for the next decade and expect prices to rise 10–15% in India in next five years.there is no possibility of salary increases in the short term ^{[citation needed]}and middle class will endup in paying their 20 years of earnings to own a home which is very high comparing to their western counterparts.The lower middle class who are not able to afford housing will tend to look for rented houses which put pressure on rental which also pushup the inflation further .The money generated as part of selling should be controlled by the govt and thereby get the taxes.

Abnormal market statistics in the year 2012

Real estate research firm PropEquity said new home sales in Mumbai and NCR dropped over 50 per cent in Q1 of this calendar year.^[6]

Housing Slump showing up in the year 2013

The real estate market in cities across India show signs of crumbling ^[7] as the Indian economy slows. The rupee has dropped nearly 20 percent against the dollar since early May 2013, scaring away foreign investors.Unsold inventory pile up while sales are down due to very high prices.

Data from property research firm Liasas Foras ^[8] shows Mumbai saw the maximum inventory of unsold homes at 155.27 million square feet or 48 months of unsold inventory during the first quarter of FY14. For NCR, the inventory has more than doubled to 31 months in the first quarter of FY14, while for Mumbai it has risen from 17 months to 40 months.Inventory denotes the number of months required to clear the stock at the existing absorption rate. An ideal scenario implies inventory should be in the range of eight to 10 months. But Mumbai would take four years to sell these homes despite a slew of discount schemes, new launches and back-room negotiations^[9]

The National Housing Bank’s Residex tracks movement in prices of residential properties on a quarterly basis. According to the index,^[10] during the period between April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall in prices.^[11]

Builders face cash crunch after RBI put brakes on the 20:80 "ponzi" scheme.^[12]^[13] In spite of defaulting on loan repayments, sellers are refusing to cut prices, for fear of starting a market rout.