The Indian Economy Blog

March 3, 2006

(Sur)real Estate?

Filed under: Business,Infrastructure — Neelakantan @ 9:46 am

India, like many other parts of the world is zooming away in the face of a real estate boom. In India there is a real estate boom in any direction you wish to see. Whether it is Bangalore, Pune, Calcutta or Chennai or Hyderabad or even already sky high Mumbai – the story is the same.

Just a few years back, Mumbai was dying in the face of a sharp shortage of housing options. But now things have reversed and there is a glut of housing options – if you have the money. Now apartments are more than just houses. They are about lifestyle. So while the first housing colonies had nothing but a security guard and a garden, these new housing colonies have a gym (spa, jacuzzi, steam), swimming pool (heated, lined with Italian marble). Some have a multiplex, shopping complex. There are those which offer a servant entrance. The list of “conveniences” is never ending.

The next step is creation of an ambience. What does one differentiate in a house? Enter themed complexes. In Bangalore there are options themed on Resorts, Venice, Bali, Europe among others. There is now a rush to “discover” new themes.

There are those who believe that this boom will continue, there are those who are not sure and those who think that this is “irrational exuberance” to borrow a phrase used by Alan Greenspan. But at this point, we see more action. JM Morgan has entered to take a piece of the action by investing in Mantri developers, one of the biggies in the Bangalore real estate scene.

The concern is that in India, stock prices are at the height of a boom (this time it is supposed to be different – really). As it happens, a boom in one sector (usually stocks) translates into a boom in another sector (usually real estate) with investors rushing to park their money in a safe place. Also, add the foreign exchange glut in India fuelled to a great extent by software engineers parking their dollar salaries in real estate (especially near the tech hubs). Low interest rates (relatively, as compared to 10 years back) over the last few years made bank loans easier. Needless to say, it became a self fulfilling boom. There is a latent demand for housing in India, but the people who buy today do so more with a view to make money out of rentals rather than with a view to stay in these houses. The end result is that people own multiple houses, when all they need is one (feel free to differ with me here) and real estate is now a speculators paradise.

On the other hand it is true that there is a lot of demand for real estate options in India. Vast portions of India are undeveloped or underdeveloped, but this is not necessarily where the boom is happening. Also, the “connections” in terms of better roads, urban transport systems, public transport, water and reliable electricity need to improve by leaps and bounds. People want cheaper, affordable (not low quality) housing options too, which atleast in places like Bangalore is non existent. The market at the premium end is only so much. A significant portion of the demand is real, but with about 20-25% (as per various estimates) driven by speculation.

But interest rates in India have slowly started rising. That means that loans will be harder to get (and service). Optimism about future salaries still holds true with India fairly at the bottom of the pyramid as far as outsourcing goes – there is still some space for rise there.

Is it a bubble? Right everybody is in a state of denial. Real estate creators (the builders) are laughing all the way to the bank. The banks are in turn sitting on crores of housing loans. The buyers (many of them) are using the combination of low interest rates and high salaries (and other income) to invest in multiple homes via housing loans. The stock market is seeing a time of boom too, even in the face of high oil prices.

The question is when will the boom snap out of this dream or will the dream run continue longer?


  1. Real estate inflation or boom, as they call it, has gone out of control in cities like Bangalore. IMO, established metros have had a stable increase unlike the disproportionate increases in the upstart tech cities.

    I think the heyday for real-estate will sustain because of the increasing willingness of foreign capital in India. This is turn increases the “potential” house buying population in the cities and consequently the demand for real estate which will drive up the rates even further.

    Comment by Karthik — March 3, 2006 @ 6:19 pm

  2. but karthik, you can’t expect the kind of growth rates that we witnessed in last 2-4 years.

    Comment by harsha — March 4, 2006 @ 8:37 am

  3. Harsha,

    I agree. What I meant to say was, real estate will still witness appreciation but as you pointed out, the appreciation rate will enter a cool-down phase soon.

    Comment by Karthik — March 4, 2006 @ 10:32 pm

  4. by 2010, indian sensex will be back to 3000, appropriately values..worldwide recession esp due to asset meltdown will lead to protectionist policies..all the “coolie” programming and BPO for sahibs abroad will go away..bengaluru and gurgaon would be back to their old indian ways…The chastened NRI that returned to india w/ hige expectation would again make a beeline in american embassies…globalization is an old game. Till the big guys are making money off it, it will chug along..afterwards, jai maharaj.

    Comment by andiron — March 5, 2006 @ 1:42 am

  5. What are the currently popular types of home loans? Are they typically 30 year fixed rate loans? If so, rising interest rates won’t affect long term buyers. (Such buyers have locked in their annual housing expense). For short term buyers, e.g., speculators, rising interest rates will put a crimp in housing prices, and may put such buyers underwater.

    But, I’m curious as to whether more exotic mortgages are available, as are found in Australia, U.K., and the U.S., such as adjustable rate mortgages, interest only mortgages, and negative amortization mortgages. If you don’t see such mortgages on the market, I would suggest to you that real estate prices may have some room to go upward yet.

    With best regards.

    Comment by Suresh — March 6, 2006 @ 3:26 am

  6. I know, the real estate boom made my dad a multi-millionaire…it’s true…

    I had a unrelated question,

    Which is the State that is most friendly to Business in India? Which State should Indian entrepreneurs look to setup their business?

    Which State has the least beaureacratic red-tape? A robust police-force, fast resolution of legal disputes?

    Can anybody give a ranking?

    Note: let’s assume the business does not involve natural resources, and there is easy access to labor of all skill-levels.

    Comment by Rahul Kapoor — March 6, 2006 @ 7:38 am

  7. Rahul… would like to congratulate your dad on his success.

    Neelakantan — you say that There is a latent demand for housing in India, but the people who buy today do so more with a view to make money out of rentals rather than with a view to stay in these houses.

    Aren’t the two parts of this sentence sort of contradictory?

    And do you have any evidence for the latter assertion ie, that the buyers are investors rather than occupiers?

    Comment by Prashant Kothari — March 6, 2006 @ 9:35 am

  8. Refer to this link in the piece, (and this is dated nov 2004 after which prices have gone through the roof again!)

    …But most experts agree that the speculators are back in business in the last six months — one key reason why prices have been moving up more rapidly than before. Cushman and Wakefield estimate that about 20 per cent of the sales currently are speculative. Vatika’s Bhalla says that 20-25 per cent of his sales derives from speculators…

    In Bangalore many builders let you buy property from them (or book or pay less than full amount) and buy it back from you at a later date at a higher price. Thus, as a genuine buyer, you end up paying a higher price.

    Comment by Neelakantan — March 6, 2006 @ 1:48 pm

  9. Hi

    That was an interesting post

    I’m surprised that you haven’ received more comments, more accolades so far

    Keep such posts coming

    Though I may NOT agree to all what your said, your blog brought back lots of old memories and thoughts about OUR COUNTRY, our society, friends and relatives

    While we as world citizens think that Justice and equality are the most important cornertones of a civil society, does the ground reality reflect that ?

    We feel that friendship, love, affection and above all our family is very important in shaping our lives and thoughts. To most of us, a mother, the epitome of love and sacrifice, plays and important role

    But what happens when the same mother is denied justice in her own family ?

    more at


    Comment by Vinayak — March 7, 2006 @ 10:56 am

  10. Yes it is unusual that the real-estate and stock-markets have run-up at the same time, and not one after the other in this round. The currently higher confidence factor on the future, easier availability of personal/ real-estate loans from the nationalised banks, and ofcourse higher income levels have caused this demand. In addition with the tax-structure allowing only anything like housing loan deduction (interest+principle repayment) salaried people have moved to it in a big-time. Will anyof these factors go away in the near term – not likely IMO

    Will the appreciation be as high as it is now – no, but is a correction in site – no, not unless huge chunks like the mill-land in Bombay come on to the market at one go. But infrastructure – roads and power have a way of making people think where to go. Hence the increases IMO would be moderate (around GDP growth rates), till an external event changes the direction. Of which none seems to be lurking

    Comment by venkat — March 7, 2006 @ 12:14 pm

  11. The mill lands would not effect the prices in bombay’s real estate. They rather have a chance of giving a boost by selling exotic houses at exotic prices that only BIG GUYS can buy.

    You will see that happening soon.

    Comment by Saurabh — March 19, 2006 @ 8:33 pm

  12. The thumb rule that investors now should apply in a over heated real estate market is that only buy what you can fully pay for. Playing on margins – on first one/two instalments is risky. Takers will be fewer as too many people turn sellers as builders start demandign higher amoutns up front.

    Comment by rr — April 8, 2006 @ 10:22 pm

  13. Political climate also influence real estate avenues…Post election, Chennai’s MRC Nagar has seen a phenomenal transformation [read as land acquired by state political heavy weights]

    Comment by Sweta Ram — May 23, 2006 @ 8:08 am

  14. Can anyone tell me what is the avg rate of appreciation in bangalore per month and per year.

    What would you advice a person who has a land worth 20 lakhs in bangalore and has to spend an avg of 6000 on rent per month for a one room flat in an ok locality. Should he sell his land and buy a flat so he saves 6000 per month. His flat will also appreciate. may be not as fast as the land.

    or should he sell his land, buy three more plots are cheaper rates and it’s more profitable to spend 6000 from you pocket as the land’s appreciation per month on an avg is more than 6000.

    I would really appreciate if you could help me out here.


    Comment by Aaliya — July 1, 2006 @ 9:37 pm

  15. Aaliya,

    The rate of appreciation in metros avg about 10% YOY, however i feel the prive are at the peak. The thing to watch this year is the developments in the north and east of india. This will have a profound effect on rest of the country. My feelings are that with increasing oppurtunities in Punjab, Harayana, Bengal and Rjasthan you will find investors will have more choices. Tier2 cities in these states will be more attractive to NRI’s and Local investors. There will be more assets chasing propotionately less capital. In mumbai – native city, the start of construction for the Navi mumbai airport will shift the focus from the central and western suburbs of mumbai to Navi Mumbai. This will be another factor in easing the demand in the western suburbs. There are 2 SEZ coming up close to the airport in Navi mumbai. knowledge based industries will prefer locating here as compared to the already congested old mumbai.
    Mysore and hosur are naturally attractive as alternatives to B’lore, their growth will cause a correction( masive )in the valuation of B’lore real estate. Cochin-coimbatore is another attractive proposition.
    The present prices are a indication of pent up demand for assets. Going fwd we’ll see tremendous oppurtunities for professionals to live and invest in. I am a tamilian aircrft engineer based in U.K., i am originally from mumbai. I am seriously looking at heading back home, i’ve ruled out settling in mumbai, banglore, chennai or hyderabad – delhi is out of question too much crime out there. I would prefer Goa, Cochin, Hosur, Baroda, coimbatore or Pondichery. I am hopeful that real estate in these cities will be affordable and offer quality living with good schools, leisure etc.
    I would prefer investing in flats rather than plots, firstly for safety/security from enchraochers secondly it is easier to dispose a flat in recession and rent it during time of growth.

    Comment by Uday pal — July 3, 2006 @ 7:08 pm

  16. Aaliya,
    With some experience in property investment, here’s my two cents worth. Once you’re past the “roof over head” bit, you should consider investing in land. What I’ve realised is that while an apartment can appreciate by a factor of 2 or 3 times, land can go up by a factor of 10 to 100 times!! One key difference is of course that land tends to be dead investment with no returns till you sell it! You need to be able to hold onto it for a while and keep paying the mortgages!! If you can the results are well worth it. I would consider land in an upcoming suburb (a key indicator of appreciation is access via existing or proposed highways).

    There was an interesting article I saw today on Apparently policy measures are being considered by the Urban Development Ministry to curb speculative land deals. The measure being considered is to force anyone in possession of urbanisable land to construct within six months of purchase or else face the prospect of the land being acquired by the government at guideline rates. This move would of course make it difficult for the land investor but I have to wonder how such a policy would be executed!!

    Policy measures being considered to curb speculative land deals

    Comment by Ganesh — July 20, 2006 @ 7:11 pm

  17. FYI .. The real estate in the US started crashing from July ( This was followed by the crash in Australia and Slow down in UK) . In China and Korea , the central banks have controlled the market . In India the real estate correction has begun .

    The US econony is slowing down . This will have an impact on real estate.

    Comment by Mahendra — October 6, 2006 @ 10:22 am

  18. Have been trying to read a lot about who actually is buying these houses? I think I am one of those oft quoted middle class (an annual income of about 5 Lacs) that is supposedly driving this boom. But fact is I haven’t bought a house yet. Some hard facts which steeled my decision were:-

    1. Upto mid 2007 – I had stayed for 5 years in Delhi in a centrally located place (Vikas Puri), paid a rent of Rs 5,500/- per month for a 2 BHK with abudant parking space and facing a big park. The house owner proudly claimed its market value was about 1.5 Crores (must be 3.5 Crores now!) Surely a very poor return for money he got. But then this man had bought it way back in 1980 for less then 10 Lacs.

    2. I booked a “builder floor” in Delhi around early 2006. The builder was into buying houses, demolishing them and rebuilding into floors. I booked the first floor of a 4 storey construction (90 Sq Yd) for 16.5 Lacs in Uttam Nagar. This was in mid 2006. Then the boom accelerated by end 2006…they said it was now worth 25 Lacs. The builder got greedy, slowed construction and all the related tricks. I finally took his offer to take double my deposit and quit. The house still isn’t sold. Its mid 2008. The builder is bankrupt and has fled. The story is repeating in the entire area.

    3. I came to Pune. The traffic was horrible, the pollution worser, the cost of everything was three times what it was in Delhi starting from fruits to furniture. The houses were also as expensive! Far flung outskirts, no electricity or water….but lot of nice morphed photos and glossy brochures…and the usual promise of once in a lifetime investment opportunity. Everyone said it was the IT.

    4. Then I met an IT graduate (the city is called the Oxford of the East)…this guy told me that offer letters handed out after Campus interviews had joining dates six months later and very few got actual confirmations. Half the guys didn’t even get interviewed. Some smaller institutes didn’t even get visited by the industry. Also, this was in sharp contrast to last year when almost everyone got a job. So it isn’t the IT anymore!

    5. Lastly, I went to a small town in MP. This one was untouched by builders. An empty 200 Sq Mtr plot with a tube well (at least ground water supply assured), stable electricity supply and in a well developed area on the outskirts was quoting for Rs 75,000/-. The airport at Bhopal was 20 Kms away, the railway station the same. That was what I used to travel in Delhi or Pune too! The vegetables and fruits were half the price in Delhi and one quarter the price in Pune. Full time domestic help was available in plenty at as low as Rs 1000/- pm. The schools were roughly the same standard but charged one tenth what similar schools charged in Delhi and Pune.

    What did I conclude? Stay on rent in a big city while you work (remember Delhi @ Rs 5,500/- ….and dropping). Build yourself a nice palatial bungalow in a small town and relax there once you retire. The amentities (hospitals etc) are still as closeby as in a metro or worst case you can fly down to Delhi for Rs 3,000/-.

    Compare that with buying a 1 Crore designer flat adjacent to a slum (or a suburb 60 Kms away from city centre) and paying all your salary as EMI all your life.

    Bottomline is…..either it crashes, else I am not buying!!

    Comment by Dave — May 12, 2008 @ 12:48 am

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