The Indian Economy Blog

December 13, 2006

329 Comments

1. A rise in housing prices in the US drags up the economy as a whole because homeowners borrow more money against their increased home equity and consequently spending increases. The home equity loan market is one of the most developed and aggressive sectors in the US.

   The same is not true for India, where the phenomenon of borrowing and spending against home equity is remarkably subdued in compared to the US’. Hence, the housing bubble doesnt mean as much for the Indian economy in general as it does for the real estate segment in particular.

   The Economist said recently that the falling housing market is a big threat to the wellbeing of America’s economy. But the converse cannot be said for India. No, the blogosphere isnt missing anything in the big picture.

   Comment by etlamatey — December 14, 2006 @ 12:23 am

2. The housing and real estate boom in India is being driven by NRI inflows into India. In 2005, the inflow was 90,000 crores ($21 billion). For China, which was the second biggest recipient, the number was $5 billion.

   The reason for heavy NRI investment into real estate is that they would like to have a long-term view into India, given the upcoming demographic dividend, and the overall growth prospects. So they are buying and selling, creating the market. Additionally, it is the simplest (and safest) way to get a foot in the door right now.

   It also needs to bear remembering that land prices in India can only appreciate over the long run ( high density, massive demand, growth concentrated in a few regions). Plus, zoning between commercial and residential areas in most high growth regions continues to be quite weak, and that also pushes up demand significantly.

   Comment by Arjun Swarup — December 14, 2006 @ 12:48 am

3. Greater fool theory it could be in most instances. On the other hand, in certain key regions, skyrocketing prices probably reflect their long-term value. For example, I’m not surprised to find that prices are through the roof on properties on Marina Drive and Panampally Nagar in Cochin, as both are clean and spacious properties strategically located. But, by virtue of proximity, there are less well-developed and connected areas of the city that are creaking under the poor infrastructure that do not justifies the premiums being asked. My two cents: do a lot of research on the local economic prospects before jumping into property. I would also invest in commercial real estate over residential real estate in most cases.

   Comment by Abhishek Nair — December 14, 2006 @ 12:50 am

4. Future growth is going to be in India and China.China received lot of foreign funds, but India received less. All the development is taking place in India is from domestic Investment and little bit Foreign Investment. There is lot of Black Money and NRI funds are flowing in Real Estate business. Going forward MNCs and Foreign money is going to come to India. India is growing at the rate of 8% PA, it would continue for atleast next 10 years.In next 25 years China will have highest GDP,followed by USA and India. So clearely Real Estate will benefit. In future, dont get surprised if you see skyscrapers all over major cities in India. My suggestion to All NRIs is dont just buy Land/Flats/House by Ads, do proper research,take help from local people. Indian Registration system is very inefficient,corrupt. If you want to buy Tajmahal, they are people who can sell it you and register in your Name. And also many Land mafias,encroachments. Despite of all these, you can expect RealEstate a best Investment option

   Comment by Ravi — December 14, 2006 @ 2:30 am

5. Whatever be India’s growth projects, the real estate is definitely a bubble.

   First, the returns. As mentioned in the article, the returns doesnt justify such a risky investment. The rule of the thumb in US is, the house price must be 11-12 times the annual rent (PE of approximately 12). If it is more than that the interest rate would kill the returns. So, for the 7K rent, the reasonable price would be around 10 lakhs.

   Second, affordability. In US, anything above 3-4 times the annual salary of the intended target buyers is considered expensive. Thus, if you are buying an average middle class house, paying anything above 10 lakhs (assuming that middle class average salary is around Rs.20K/month) is a risky venture for resale. And if you are buying a house for 50lakhs make sure there are enough guys who earn a salary of Rs 1 lakh per month who would love your house and its location.

   Third, high variation. In Chennai, for example, a lot of properties are still availble for Rs. 500/sq ft (around 30 km from City), while property prices in some parts of the city are above Rs.10000/sq ft. This is due to lack of infrastructure development. In five years down the line, if the infrastructure improves and transportation gets better, people paying the 10K/sq ft would move out of the city, and those high priced properties would deflate.

   Fourth, risk component. While other forms of investments have very little loan component, house investments are almost financed by 80%+ loans and thus presents a huge risk, if the property tanks by even 10%. If the banks raise their rates OR property market cools OR if salaries get flatter, a lot of bankruptsies could happen for those who bought on rosy expectations.

   See more on property bubbles from the link: http://en.wikipedia.org/wiki/Indian_property_bubble

   Comment by Balaji Viswanathan — December 14, 2006 @ 3:12 am

6. Simply calculating the rent to carrying cost is erroneous. We need to take into account the growth rate in rent. The price must match the discounted stream of current and future rents. In projecting future rents, we need to take into account the growth rate. To put into formula

   P/E= 1/(k-g), where g=growth rate.

   Let us make some assumptions about growth. Real GDp is growing at 8% and inflation is currently at 7-8%. let us assume that 6% real growth is sutainable for the foreseeable future (conservative assumption) and let us say that 4% inflation is sustainable (again conservative). So, g=10%. Interest costs are 8% and let us say that we have further 5% maintenance and upkeep costs (to offset depreciation) and taxes (to put that in perspective, we are talking about something like Rs. 135,000 per year, no mean sum. That puts k (cost of capital) at 13%. Plug in the numbers and you get a PE of 33. Multiply Rs. 84000 (annual rent) by 33 and you get Rs. 27,72000! Of course, I played with the numbers a little. But they are all within the bounds of plausibility.

   In a rapidly growing economy, price growth will lead rent growth because prices are forward looking whereas rents are set to clear current market suppyl and demand (although stuff like rent-control distort this).

   I am not suggesting that the Indian real estate is rightly valued or a great value proposition. Like most Indian assets, it is priced for high growth and stability in the foreseeable future. Several political developments can potentially upset that applecart.

   Comment by srinivas — December 14, 2006 @ 4:40 am

7. i agree with srinivas, you just cant calculate rent to carrying cost. land is a scarce comodity in india and indians are generally conservative investors and hence are more comfartable with more physical assets such as land and gold.
   but, for a growing economy high real estate costs discourage investment and decrease investment in infrastrucutre such as transports and other durable goods.

   Comment by krishna cherukuri — December 14, 2006 @ 6:41 am

8. The real rent has been growing by inflation rate and doesnt jump as high as the real estate prices. Its erroneous to assume rents to go at the same pace as inflation+growth rate. This has been the case with many of the property bubbles, especially in the mother of all property bubbles - The US. The median rent has just gone by 2 times in the last 10 in Chennai, and this works to a rate of 7% similiar as WPI.

   Interest rates @ 8%!!! You must either be in US or should have sub-PLR rates. The average interest for a retail loaner is over 10.5%.

   And talking of long-term and projections of congestion. In the long term, land use might get more efficient and transportation & communication would enable huge suburban sprawls, and rents in cities would come down. To give a perspective, Indian population density that is expected to grown to about 500/sq km in 2050 can easily be managed with better land usage without having property prices to zoom too much.

   So, those who keep confusing India’s growth rate with the growth in residential rents should be beware their pitfall in reasoning. Use data from sophisticated economies (as India is soon to become in a decade) and do enough homework before buying property.

   Comment by Balaji Viswanathan — December 14, 2006 @ 6:44 am

9. The biggest problem in Indian market is a huge variation in city and suburban markets and this is set to even out in the future. For eg, recently a lot of hotels companies have started to move to Noida when it offered land at less than 1/40 than DDA offerings. As infrastrcutre develops the prime city properties are gonna cool down (like what we had in LA, SD and Florida realty markets that are collapsing from over-heating) and these virgin lands might hotten up.

   And another factor is the over zealous IT guys. India has been growing at 7% for the last 10 years, but only in the last 2 years I’m seeing the huge property growth, while in the period from 1994-2004 the property prices were growing with inflation. So, this time it is more of hype than a reflection of the GDP growth. There is a lot of hot money and too young people, who dont know what to do with. And NRIs with fat pockets are joining the game.

   In the foreseeable future, commercial property - hotels, retail and office segments will grow at the rate of Indian growth, while residential properties might be lucky if it avoids what US had been undergoing now.

   Comment by Balaji Viswanathan — December 14, 2006 @ 7:00 am

10. Balaji,

    The point of my calculation was not make precise calculations but to suggest that under “plausible” assumptions the prices are not that outrageous. Now three rebuttals;

    1. In the long run, if rent’s (imputed and actually paid) share of GDP is to stay stable then nominal rent must grow at the same rate as nominal GDP. In reality, as a country become more propserous, rent’s share of GDP ought to grow faster because people will devote a greater proportion to housing as they go beyond satisfying just their food needs.

    2. I used 8% because that was the rate used in the example in the article itself. I have no clue what the rates are. At any rate, I gave plenty of cushion in annual maintenance costs and by using a conservative growth rate for rent.

    3. They have something called suburban sprawl in the US. Now they have exurbs. These trends of moving away from the city have been growing for 50 years. Yet home prices in New York City (to take and example) have actually shot up more than for the nation as whole. There are many arguments. One of the fallacies you are committing is taking a static picture of the demand whereas you are using a dynamic picture of supply.

    Once again, I would not buy real estate in India at these prices and it is not because of the reasons you give but because I don’t believe that India’s broader economic growth can be sustained given the political realities of India.

    Comment by srinivas — December 14, 2006 @ 7:44 am

11. I just finished an international business project on Real Estate in India. Here are my 2 cents …

    Real Estate markets are speculative. You can go through a lot of numbers, look at the GDP growth rate, population segmentation, purchasing power etc. But the real estate market or any market is not solely guided by numbers.

    The Indian middle class is 330 million, the GDP of bangalore is $6000 and the 50% of India’s population is less than 21. A report by one of India’s leading agencies projected a shortage of 20 - 25 million houses in India.

    When a reasonably well to do couple is willing to making around $40000, is it unrealistic to expect them to shell around $150,000 for a home ? House prices in India are not taking a fall anytime soon ! Even in the US, the housing bubble went from an appreciation of over 400% and settled back at 200%.

    And srinivas, good analysis, though I wish you would be a bit more optimistic about the political realities !

    Comment by globetrotter — December 14, 2006 @ 8:53 am

12. There is one thing that the calculation missed to take into account to. It is of the income tax exemption on housing loan and interest.
    But even after taking that into account,according to my father’s calculation(I am no expert), the return on investment is not profitable.
    But then, people are increasingly becoming able to buy the flats which is why they do - either for status or just to own a property. The prices are fixed as per demand and is that a bubble ?

    Comment by Rk — December 14, 2006 @ 10:03 am

13. sure there is. how do i know?

    - when some one who has graduated a year ago from a silly commerce college and is now a BPO employee is discussing about how he bought a Rs.20 lakh appt and how it has appreciated by 50% in a year already.

    - When you start hearing above repeatedly from different people, every time you are in the loo.

    - When housewives start becoming real estate agents in droves to earn an extra buck.

    - when you tell a real estate agent that you budget is NOT a crore for a small bungalow, and he then barely gives you any attention.

    - when those 1 crore bungalows appreciate by 25-30% in the next year.

    - when god forsaken out of town locations are touted by builders as ‘annexes’ to well known areas and marked up for being ‘annexes’. When the floating population buys these in droves and calls it the next hot and happening area and jacks prices to crazy levels.

    Comment by sarang — December 14, 2006 @ 10:09 am

14. A lot of distortions exist in Indian economy due to
    tax evasion and black money, etc. Real estate is the
    safest and best place to park black money, hence the
    unjustifiable prices. And for the middle class and
    others, the price appreciation in the long run beats
    both inflation and gives the best and safest return,
    when compared to FDs in banks, etc. Most people tend
    to buy empty plots (say, one ground) and retain it
    as an investment asset, never building a house there.
    hence you may find empty plots amidst conjested areas.
    Lack of alternative avenues and fear of the stock
    market scams (with little trust even in mutual funds)
    drive them to real estate.

    Where ever black money is generated in huge quantities,
    real estate boom and specultation is rife. My native
    is Karur (TN) a booming textile town, where the local
    GDP is some 4000 crores p.a. So some areas the real
    estate sells for Rs.7000 per sq.feet. (empty plots).
    too much black money is generated every day in
    many businesses and from corruption. Towns with simlar
    population do not have similar real estate values.

    It may be termed ‘false estate’ instead of real estate !!

    Comment by Athiyaman.K.R — December 14, 2006 @ 12:22 pm

15. Suppose the govt abolishes personal and corporte income tax
    completely ; and there is very little cash trascations
    in trade and industry (like in US) ; and all real estate
    registrations are online ; and suppose if govt abolishes
    or reduces the registration charges to a nominal rate
    of say max Rs.15,000 per registration. that is if
    there is no black economy and valuations are transparent
    and registrations at market value, then the picture
    will be very very different in real estate, especailly
    in mofussils and subsurbs of metros…

    Comment by Athiyaman.K.R — December 14, 2006 @ 12:31 pm

16. Again no body bothered to look back at the return and affordability picture. I’m yet to have a single calculation in the comments that shows buying a residential property is economically prudent. From my own property experiences (both renting and letting out for rent), I saw a rental growth of

    Comment by Balaji Viswanathan — December 14, 2006 @ 1:15 pm

17. Again no body bothered to look back at the return and affordability picture. I’m yet to have a single calculation in the comments that shows buying a residential property is economically prudent. From my own property experiences (both renting and letting out for rent), I saw a rental growth of less than 25% in the last 3 years, while my mortgage has gone by 40% due to interest. Unless you buy commercial property in prime land, dont expect a zooming in rental incomes.

    Indians are living in their own dreamland. They are the only kind who will say that a Rs.40 lakh house is affordable while the average income is of the order of Rs.2 lakh/year and interest rates are around 11%.

    Comment by Balaji Viswanathan — December 14, 2006 @ 1:16 pm

18. Pegging the cost of capital at 13% appears to be abnormally low.Two rasons:
    1.I believe the interest rate on home loans wld be atleast 5-5.5% more than the inflation rate. A more realistic number wld be 10% (and thats just a conservative estimate).
    2. More importantly, isnt it theoretically incorrect to equate cost of debt with cost of capital(ie expected returns). A person taking a home loan @ 10% wld obviously expect a return higher than that for taking the risk. Remember, he has to pay out from his personal assets if the hosuing prices crash. (for example, if one borrows money @13% to invest in the stock market, the expected return wld be atleast 17%, and not 13%.)
    I wld tweak those assumpions as follows:
    maintenence = 4%
    cost of capital = 10% + 3.5% = 13.5%
    expected return = 17.5%
    When the economy is growing @ 10% (nominal growth), it seems logical that rents too shd go up each year by 10%. But that doesnt seem to be happening. Even assuming that ther rents grow @ 10%, the P/E wld be 13.33. If one were to factor in tax benefits of, say 15%, then the expected returns wld fall to 14.875% and the P/E wld rise to abt 20. A P/E of 33 appears to be really unsustainable to me.

    Comment by sai aravindh — December 14, 2006 @ 4:29 pm

19. I have done some analysis on this in the past and have designed a “Real Estate Cash Flow Calculator” specifically for India.

    http://www.deepakshenoy.com/articles/realestate/realestatecf.htm

    The deal is: a bad deal for cash flow. In India, Cash flow yields are of the 2-4% varieties, considering dividends from companies or rents from real estate. A year or so earlier, commercial space yield was about 10% but even those prices have shot up now. (Bangalore)

    The calculator I have made takes into account a number of factors, all of which are customisable, including:
    a) Rent growth, Property value growth, inflation
    b) Taxes, maintenance costs and such.
    c) Income tax exemptions available (if it’s one’s first property)
    d) Loan costs, including processing fees and “exit loads”
    e) Net gains considering that if you buy and rent out an apartment, you’ll still have to pay rent to stay in your house (that scenario too)

    Now regardless of how you look at it, the model works only if capital appreciation continues. A stagnating or falling market will kill returns.

    The other things some people talk about here is leverage. The fact that India does not have the over-financed real estate market of the US. Well, true that India does not have “interest only” loans, but I think the finance market is still in a tizzy. Typically, banks loan upto 85% of the property, and provide “interest only” facilities until the building is ready for posession. This is equivalent to the bubble-phase of the US.

    Secondly, a large part of the market rises due to black money, which is one of the reasons why doctors and lawyers are by far the biggest speculators in real estate. (Hint: They get most of their money in cash)

    Thirdly, there is leverage because of the staggered payment mechanisms, where builders take money as each “slab” is built.I personally know someone who’s booked 10 flats in an upcoming residential complex - his concept is:

    Each 1500 sq ft flat needs 50K booking amount so the initial investment is Rs. 5 lakhs. The builder is increasing rates by Rs. 100 per sq. ft. per month, and I buy at Rs. 1850.

    In three months, it’s time for my next installment, Rs. 200,000 per flat. So I sell thee flats at the builders new rate of Rs. 2150, and make 1,350,000. Now I have to pay 16 lakhs, out of which 13.5 has come from my profits, so I piggy up another 2.5 lakhs. Total investment till now: 7.5 lakhs, for 7 apartments.

    Three months later, builder’s rate is at 2450, and I need to pay up another 300,000 per apartment, meaning 24 lakhs. So I sell three more apartments and make 27 lakhs profit, and pay 24 lakhs, and keep 3 lakhs as profit. Net Investment: 4.5 lakhs, 4 apartments.

    Three months later, builder’s rate: 2750. I need to pay 500,000 per flat now, and that totals Rs. 20 lakhs. I sell two flats, get Rs. 27 lakhs as profit. Pay up 20, get back Rs. 7 lakhs. Net investment : 0 (2.5 lakhs profit) , 2 apartments left.

    And after three more months I settle the last two apartments at Rs. 3,000 each. I make 90 lakhs, and after all costs I still net about 85 lakhs as profit.

    That’s speculation. And unfortunately it’s hit hard, as the flats aren’t quite selling at “builder’s rates”. Or selling at all in fact. Plus, the builder has put in a Rs. 200 per square foot “transfer” charge if the property is sold before the project is complete. Nips the speculation, they think, so that’s why you see properties in Whitefield advertised at so much lower than the “builder’s price”.

    The bubble has burst in Whitefield, Bangalore. Will it burst everywhere else? Well, like the US, the bust will be area specific, and it’s another matter of speculation to see where it will hit next. The new airport area? The Sarjapur/OUter Ring road part? The inner city, since they’re comeing with a “Greater Bangalore” plan?

    But come it will.

    Comment by Deepak Shenoy — December 14, 2006 @ 4:52 pm

20. hi

    hi am the one who sen the mail to Amit.

    This is an interesting conversation.

    I see two groups. One who believes that the future growth potential/land scarcity/demographic dividend makes the current real estate prices in tier 1 and tier 2 cities justifiable. The other group believes that it is a bubble even with all the growth accounted into.

    Srinivas, just for argument sake, in your calculation if we take the maintenance costs to be 4% instead of 5% the PE will turn out to be 50 and the value of the house can be calculated as Rs 52 lakhs!. Or if I use 6% instead the PE will turn out to be 25 and the price of the house can be calculated as Rs 25.8 lakhs. Still more if I decrease the real growth rate by 1% or increase the inflation by 1% the PE will turn out to be 20 and the value of the house can be calculated as Rs 16.8 lakhs.

    My argument is pretty simple.

    * People are investing in real estate currently not based on current rental returns.

    * They are investing based on either one of the following
    - future price appreciation
    and/or
    - future rental growth.

    I’m not sure if there is anything else. For some investors socio-psycological reasons can be there, but I doubt how much percentage of the real estate investors fall in that group.

    * The price appreciation (15% - 200%) seen currently is not sustainable. ( for argument sake if it is going to increase at this scorching speed, in 25 years people will have to live in tents/huts, it will be so much unaffordable ).

    * The prices have to stabilize ( at or near inflation rate.. how many ever years it takes).

    * Once the prices stabilize the rental returns have to make sense.

    * Let us assume a very rosy picture of prices stabilizing at the current levels.

    * So now the real growth due to all the factors mentioned above in the discussion (NRI funds, Foreign funds, local growth ..) the actual person living in the area should have grown to a level where he can pay Rs 20,000 rent for this apartment.

    * The question is will that happen? If yes when will it happen?
    Will it take 5 years, 10 years or 20 years. Based on what we come up with, that many years of growth is already priced in.

    * So now either the prices can remain flat and meet the rental curve sometime in the future.
    or
    Prices can grow and still take a longer time for the rental curve to meet the price curve
    or
    Prices can come down and meet the rental curve.

    * I’m betting on the 3rd possibility. But based on the responses am seeing for this type of discussion and exuberance abounding I feel it might take a couple of more years for that to happen.

    Annam

    Comment by Annamalai Veerappan — December 14, 2006 @ 5:04 pm

21. though i dont know much on all these subjects i noticed one thing..
    a 27lakh flat fetches one 7000Rs…
    well i doubt that because in certain areas of chennai(say tnagar)for a flat worth that much you can get rent btw.10-15000Rs.
    and well it is based on land appreciation..
    and it isnt a foolstheory as the rate of appriciation has been good…houses which were abt 3 crores 1-2 yrs back are now close to 6k now..

    Comment by vishesh — December 14, 2006 @ 5:18 pm

22. Annamalai, I don’t think Rental values will ever meet the grade. It’s not now, but over the last 15 years, the real cash flow yield has been 3% or so. I don’t expect that to change very soon. In fact if property prices go down, rentals will also see a dip; exactly *that* happened 10 years ago during the big crash of 1996-97 in Bangalore.

    Perhaps the past does not reflect the future (after all if it did librarians would be billionaires) but I would not really bet on yields going much higher than 3%. That would require a stable market. We’re far too immature a market for an era of stability of any sort - there will either be ups or downs, and small hiatuses in between. Note here that the down cycle seems like a stable period for it dips violently at the beginnning and stays depressed for a while…going forward, with the enormous liquidity available, there won’t be time for long plateaus.

    But I agree that there is a bubble of sorts. I’ve been in the trenches and the sidelines, really. I sold and bought property in 2003, and the next buy cycle will take me years. I’m willing to wait this out simply because I have better places to put my money - the stock market - and the risk-return-liquidity situation on the real estate market is not as kind. Note however, that the cash-flow-yield is still the same - 3% or so.

    Comment by Deepak Shenoy — December 14, 2006 @ 5:53 pm

23. >
    If by that, you mean, it is not going to happen any time soon, maybe ur right. But at some point, the yield wld hv to move to the equilibrium zone of 8-12%. As the theory goes, the value of an asset is just the sum total of the present value of all future cash flows. There is no reason for real estate prices to behave otherwise (in the long term).
    BTW, i think ur cash flow calculator ignores one important aspect: the quality of cash flows Since the quality of the two streams of cash flows enumerated is vastly different, they are not comparable on an undiscounted basis.

    Comment by sai aravindh — December 14, 2006 @ 6:30 pm

24. Like one of the commentators had already said, I feel the market is being driven up by the NRI money and the black money floating in India. Middle class people cannot afford to buy flats in good localities. If they already have something, they are lucky.
    The following is a link of an article written by Peter Foster of the London Telegraph. From what he says the developed world is worried about the rising real estate prices, which they feel do not reflect the true value of assets.

    http://blogs.telegraph.co.uk/foreign/peterfoster/nov06/bangladesh.htm

    The real estate market will eventually stabilise (when supply meets demand) but I do not think it is going to happen in the near future. More and more Indians from abroad are coming back to India. Also, companies from over there are setting up offices and residences here. And as for black money, corruption shows no sign of abating…demand for good houses in good localities is going to spiral.

    Comment by Nita Jatar Kulkarni — December 14, 2006 @ 6:57 pm

25. Deepak

    I do not have a good idea of the historical rental return % in India.
    Is it around 3-5%? If so why? A bank deposit would have given more in the past (8-10%). Is it social reasons or pride of being a home owner or something else?

    Does anyone have good numbers or statistics for the rental/owning cost ratio.

    But as Sai mentions even if this was true in the past, now with real estate done as an investment would reasonable returns (more than inflation and interest rate) not be expected?

    My other question is what will happen when the price appreciation stops? Speculation should end. Once speculation ends will the price remain at these levels?

    Also does anyone have good information on the previous real estate crashes in India.

    Robert Shiller (in his book Irrational Exuberance - second edition) mentions about the Delhi crash in 1990’s. He says it went down by 50% (I think it is a inflation adjusted number).

    And in the web I just read that there was a crash in mid 1990’s in Bombay and Bangalore, but do not know anything more than that.

    Does anyone have facts, articles, notes on the previous Indian real estate crashes?

    Deepak, could you elaborate on the trend in Whitefield, Bangalore.
    That will be very informative as we can try to get a picture and then use it to extrapolate to other Indian cities. That might really help a few people in making their decisions.

    Annam

    Comment by Annamalai Veerappan — December 14, 2006 @ 8:16 pm

26. Sai, I’m not sure what you mean by quality of the two streams of cash flows. If you mean rental cash flow vs. capital appreciation, they are compared separately. There’s no real relation between the asset’s cash flow and the net appreciation value - each targets a different goal.

    Annamalai, historical rental returns are my own assessment, from 92 till now, which is the period I have the approximate first hand knowledge of three cities - Delhi, Mumbai and Bangalore. Actually I am not entirely correct; rental returns can even go to 6%, but typically they are far lower than the interest one pays on the loan (i.e. your rent never covers your EMI on an 80% loan) Yes, it has not made sense to me either. A bank deposit, in the late nineties, offered upto 12%. The rates slipped below 10% only after 2000 I think. In fact the borrowing rates in 1997 were 17% for vehicles and I think home loans were also around that rate.

    In 2000 or so I know people who bought apartments for 15 lakhs in Raheja Residency, Koramangala, a “suburbian” apartment set with facilities like a gym and swimming pool etc. Rents there were at the 5000-7,500 a month range, which at 4-6% was a darn good deal. Today the flats cost 50 lakhs plus, and rentals are 18K plus. That’s about 3.6% or so.

    I don’t have any page links but http://www.persquareyard.com may help - search for the same area, sale and rental values.

    A link that may be useful: http://www.ciol.com/content/news/2006/106042710.asp

    “From the peak level, prices started plummeting in 1995. Between 1995 and 2000, the property bubble built on speculations burst and prices declined by almost 30–40 per cent all across India, including Bangalore. There was a slight recovery in 1999-2000 period, riding on the dotcom boom.”

    Whitefield wise: Think oversupply. It’s a funny phenomenon there - first hajaar apartments came up out of the blue. Speculators had bought according to the model I had earlier described. Now many of them want to sell, and can’t because the demand isn’t that high. They don’t have the money to cough up the monthly payments (check a sample schedule out here: http://www.prestigeconstructions.com/shantiniketan/PSNPricing.pdf) so the builder has to slow construction down - not the prestige one, they have enough money, and I used their PDF only to show a sample, but most of the smaller builders have suffered. Meaning now the slabs are getting build slower and slower, and projects are delayed by a year already, with dates moving from 2008 to 2009. For a while demand sustained, taking prices above Rs. 3,000 a square foot. Right now you would be lucky to get Rs. 2,500 in many of the apartments, which have remained at that rate or below for the last few months.

    This speculator bust hasn’t been mega-funded by the banks - as I said it’s largely black money that’s funded it. Someone said black money is because of corruption. It’s not. It’s by every busienss that deals in cash - factories, shops, doctors, lawyers alike. They don’t want to pay income tax, so they keep the money as cash, and with all the restrictions today, real estate is the only avenue left to invest. Eventually even that will be curtailed, and the lack of money will then SERIOUSLY affect demand; and soon, the bust will happen.

    But there is a strong feeling in India that “you can never lose money with property”, easily forgetting the number of times people already have. Therefore at busts, some more people invest, newbies to the investing grounds. The cycle carries on, and on. When institutions come in, this may change. Currently though, the mania is omnipresent.

    Comment by Deepak Shenoy — December 14, 2006 @ 10:47 pm

27. A very interesting discussion everyone. There does seem to be some sort of consensus that property prices in some areas of India have now become overvalued. Beyond that contributions seem to fall into two camps:

    1) Those who consider that this over-valuation will at some point produce a correction, in a way which has been fairly normal under cyclical conditions in economies all around the globe for some time now. That is some sort of soft landing scenario.

    2) Those who explicitly want to use the term bubble to describe what is happening to the property market in India at the moment.

    Since the question this post asks is whether we may consider the current Indian real estate boom to be a bubble, I would be inclined to say that nothing I have read here convinces me that it is, and I would basically be prepared to say that it isn’t.

    But the whole point here turns on what exactly a ‘bubble’ is. Essentially the whole situation is rather confusing, since there is a general tendency to assume that any rapid increase in property values in any market which may be subject to some kind of correction at some point may be considered a bubble. I think this is a mistake, and I think it is a mistake since in the middle of all of this we may end up losing the very precise meaning that bubble has traditionally had in economic discourse.

    A bubble historically has normally been considered to be a very special phenomenon, and not every economic excess should be thought to constitutes a bubble. When bubbles burst the economic consequences are usually very unpleasant indeed, and central bankers tend to live in fear and dread of bubbles since their bursting is normally thought to be associated with protracted and enduring debt deflation, and indeed cbs normally argue you can only really tell a bubble once it has burst by looking at what happens next. The US stock market crash in 1929 is the classic modern case here.

    Now in these terms I am far from convinced that what we have at present in the US is a bubble, and even if it was, it certainly couldn’t be considered to have burst. Obviously the jury is still out - and Nouriel Roubini (for eg) certainly argues that it is a bubble - but the broad consensus among serious economists seems to be that it has been a boom with excesses (froth was Greenspan’s expression) and not a bubble in anything like the classic sense.

    The last really clear bubble burst in Japan in 1989, and it is worth noting that to some significant extent the Japanese economy is still trying to cope with the consequences. Certainly property prices haven’t moved too much since 1992 (when the other leg of the bubble, the property one - since it was the stock market which blew in 1989 - finally burst).

    There was some debate in 2001 about whether the internet boom was a bubble, or simply an excess. Since the consequences of the termination of the boom were relatively benign, and since there was a real productivity component at the heart of it, I still find it hard to refer to this as a bubble, but that may be just a terminological wrangle.

    Equally I don’t like to describe every political tendency I find abhorrent fascist, since then this quite precise term in a socio-political sense gets stripped of all its content, and it makes it difficult to ask the questions you need to ask about whether Russia and Iran are currently moving towards a kind of modern version of fascism or not.

    So I think there is some virtue in sticking with the standard and widely accepted uses of more-or-less technical expressions.

    Now there is one reason I haven’t mentioned why there has been so much reference to the idea of ‘bubbles’ in recent times, and that is the presence of a phenomenon which many regard as an excess of global liquidity. This concern is often expressed at - for example - the Bank for International Settlements in Basel. Essentially people are arguing that interest rates on a global scale have been far too low in recent years, and consequently some normalisation is in order, otherwise, it is argued, there is a widespread danger of property booms being converted into bubbles. So there is a real measure of concern here.

    The tricky question is why are global interest rates holding so low? Or put another way why is so much cash flowing into places like India and China (or Turkey or Hungary). This one is hard to answer, but Ben Bernanke did advance the idea that there was some sort of savings glut going on in many developed economies (not the US, but certainly places like Germany and Japan) as baby-boom-heavy ageing populations tried hard to save in expectation of their imminent retirement.

    I personally tend to favour this kind of argument as it fits coherently with the weighting I give to demographic factors (both the dividend and the ageing penalty), but there is certainly no consensus on any of this at this point.

    The big issue (or worry if you like) is how sustainable current global property prices actually are. Basically I think we have seen a sustained and significant rise in many developed economies for two main reasons (India and China and Turkey etc are rather different cases here, since as many have commented, whatever the short term ups and downs we may see, long term as India develops property prices are set to rise substantially, I simply don’t see why India should be that different from everyone else in this sense).

    1/ The very cheap interest rates which have been widely available. These simply push up prices, since really the monthly payment is what determines the total capital value of the first-time-buyer entry level, and then the whole pyramid adjusts in proportion. So in a certain sense the inflation-adjusted book prices of properties may simply bob up and down as interest rates fluctuate. (But as I have noted in India we should expect a long term secular rise).

    2/ We have seen a shift into property as a desired asset for saving (ie a behavioural change) which has taken all across the globe. Quite what this has to do with the possible unreliability of pension systems, or with possible future reductions in the level of payments to be made in societies with paygo-based systems remains to be seen.

    In any event (2) is a tendency which is unlikely to reverse, so this portion of the increase should be permanent (give or take fluctuations). The big issue is the interest rate one. Should we expect global interest rates to rise, to fall, or to remain broadly the same over the coming couple of decades? The person who can answer this question already has a large part of the answer to the question posed at the top of this post, and a lot more besides.

    Comment by Edward — December 15, 2006 @ 1:29 am

28. Back in 2002 Stephen Roach interviewed Nobel economist (and life cycle saving theory specialist) Franco Modigliani about deflation and the state of the US consumer after the US stock market correction. I have this on my website, and some may find it an interesting read to help think about some of the issues involved here.

    I would just draw attention to a couple of points. Firstly re-reading the interview I note that Modigliani does refer to the internet stock market boom as a bubble:

    “I must confess to being surprised about the resilience of consumption after the stock market bubble popped. I would have expected some retrenchment. I would have also expected some related damage in the real estate market and the dollar. I still believe at some point there must be some repercussions.”

    I think this would be just the point, since he thought it was a bubble he was expecting repercussions, there were no serious repercussions (we are not talking about a mere recession here) so logically he might have liked to reconsider whether it was in fact a bubble.

    Of course there is another variant of the whole bubble argument which some advance at this point, and that is that the correction for the Nasdaq boom is still to come, since the low interest environment (for which the people who hold this view normally blame Greenspan) is argued to have been postponed by the housing ‘bubble’ and the day of justice will one day have to arrive. I don’t have much sympathy with this view since I think the roots of the low interest environment go a lot deeper (Greenspan wasn’t, for example, making policy decisions at the Bank of Japan) but still I think the proof of the pudding will be in the eating, and should we now see US consumption take a major historic knock I will be prepared to revise my view.

    A second idea that Modigliani raises is the following one:

    “I am suspicious of those studies that find the wealth effect is larger from real estate than equities. Theory tells me it should actually be the opposite. That’s because the house in part, produces a consumer good — housing services, which we consume. When the value of the house I inhabit goes up, its implied rental value increases. But that does not significantly improve my spending power, because my imputed rent has gone up as much. Any wealth effect on individually-owned property must net out the consumption of the service we derive from living in our homes. Those adjustments need not be made for stock portfolios. It is possible that new refinancing instruments, such as home equity loans may have temporarily distorted this relationship. But I would view this as a one-time shift, not as a permanent realignment of the link between wealth and consumption.”

    Now apart from the obvious point (but none the less well-made for being obvious) that people actually live in houses, and this makes them basically different from stocks, Modigliani talks about the consumption of the service that we derive from living in our homes. Now what strikes me is that people haven’t been thinking enough (globally I mean here) about the fact that people may well be getting more consumption out of their homes than they were say 15 years ago. If this were the case you could expect people to be prepared to spend a greater part of their disposable income on their home, all other things being equal. Again if this were true the value of property would be rising in relation to other available consumer goods and services, and that is, of course, exactly what we are seeing.

    Comment by Edward — December 15, 2006 @ 2:05 am

29. srinivas said - I don’t believe that India’s broader economic growth can be sustained given the political realities of India

    This is something to ponder about. The growth is being driven mainly by sectors, and that section of the population that were not allowed to grow due to socialism. The selective liberalization has set these sectors free. Once they pleateau, what will happen? Will we see greater liberalization, in agriculture, in labour, education etc? Remember, 35% are still officially illiterate, and if you look at it more realistically, about 50% will be illiterate beyond writing their names and reading shop signs. The reforms which allow these people to rise up in life are nowhere in sight. Given the leftist bent of the politics in India, are those reforms even likely?

    Comment by Gaurav — December 15, 2006 @ 2:10 am

30. A good reading on US property bubble, and you could also learn about all other property bubbles - Japan, Europe, UK.. from the links.

    http://en.wikipedia.org/wiki/United_States_housing_bubble

    Grobal housing scenarios and bubbles:
    http://www.economist.com/finance/PrinterFriendly.cfm?story_id=5283797

    India is the new entrant to this big party.

    Comment by Balaji Viswanathan — December 15, 2006 @ 2:24 am

31. When REITs, like what we have here, come to India a lot of reason & logic might enter the real estate markets, from the total mess out there now.

    Comment by Balaji Viswanathan — December 15, 2006 @ 2:26 am

32. I am a Hyderabadi and it really aches me to see the city’s CG move away from my locality to Madhapaur, home of the Cyber towers. Some of my hyderabadi friends are making profits of well over 15% without even actually occupying a new apartment. I am happy for the ones that did profit, but always scared that the next purchase would result in a terrible loss.

    That aside, a racket involving HUDA is apparently operational in Hyderabad. The officials who apparently own their own real estate development firms, threaten locals to sell empty land at government prices and then eventually get access to this land themselves. I do not know how much of this is true, but I have heard horror stories involving corruption in the Hyderabad real estate market.

    Honestly, I think Hyderabad has a very big water problem (and a very bad water-table) and I do not see how a real estate boom such as the one currently being noticed can be sustained.

    Comment by Girish Mallapragada — December 15, 2006 @ 3:04 am

33. hopefully not going too far of the topic,
    industrial land in the outskirts of chennai have experienced a real boom in propert prices some where in the range of 400-500% over the last five years, especially in sri perumbedur. the driving force of the boom has been ivestment by auto companies and ancillary units mainly. nokia and motorola too have set up shop here. what im trying to point out is that some of these price rises are caused by huge investments (scale of which have never seen before in india). hence this boom cannot be categoriccaly declared as a bubble,though i do agree that there is a whole lot more liquidity in the markets which creates a lot of froth which attracts land speculators.

    Comment by krishna cherukuri — December 15, 2006 @ 4:51 am

34. Edward

    Thanx for the 2 two detailed posts. I learnt quite a bit.

    I stand corrected for using the term “bubble”. It is just for the last 5 years I’ve been observing/reading about economics (that too from a lay man’s view). I’ll use the term “over heating” from now.

    Quoting from your previous post…

    Now what strikes me is that people haven’t been thinking enough
    (globally I mean here) about the fact that people may well be
    getting more consumption out of their homes than they were say 15
    years ago. If this were the case you could expect people to be
    prepared to spend a greater part of their disposable income on
    their home, all other things being equal. Again if this were true
    the value of property would be rising in relation to other
    available consumer goods and services, and that is, of course,
    exactly what we are seeing.

    According to the above statement ‘we have been getting more consumption out of our homes’ and hence real estate prices have gone up. I’m quite fuzzy about what ‘getting more consumption out of our homes’ means. It will be great if you can explain that in a way a layman can understand.

    But for argument sake let us take that real estate is going up due to a real change in the value we get out of it.

    If this is true should not the rents also be going up? Am I wrong when I say that?

    But in the past 5 years in US and UK real estate prices have gone up anywhere from 50% - 400%, but the rents have not gone up anwyhere near that range. Infact it has gone down in more than quite a few places. I feel India also falls in this bracket.

    Your thoughts would be greatly appreciated.

    Annam

    Comment by Annamalai Veerappan — December 15, 2006 @ 4:55 am

35. Annamalai Veerappan

    rents have gone up substantially in the southern cal, new york and other “hot” markets in the US. they have gone up anywhere between 30% to 70% based on the region over the last 3 years. one reason for the rents not sky rocketing is because of the advent of arm’s and intrest only loans in the US which attract home owners as well as “flippers”.

    Comment by krishna cherukuri — December 15, 2006 @ 5:12 am

36. Rental costs vs. cost of ownership is one comparison that is academic at best. When the cost of owning far exceeds the cost of renting, yes, it is a bubble. But this rule ignores the fact that ownership of real estate is not a cold, economic decision but a supercharged, personal goal people all over the world. Pure investors aside, and in most markets they are fewer in number than end-users, real estate prices are driven by intangibles that cannot be explained through cost vs. value (i.e. rental vs. ownership) analysis. Real estate ownership in India is even more emotion and culture driven than in the west.

    Comment by Floridian — December 15, 2006 @ 5:36 am

37. The last bubble in real estate in India peaked in Jan 96 and burst
    soon. Lot of specultaors who had borrowed heavily to play the
    musical chair game of real estate went bankrupt and it took many
    years for recovery. The situation was the same all over India from
    metros to small towns.

    this time i amm not sure if this is bursting bubble, but prices
    may freeze and number of transactions drop ; i heard it in Gurgaon
    this had already happened some years ago, which very high priced
    properties and values being stuck ; new buyers do not offer to
    buy at these rates, while holders of property are not ready to
    sell below the ‘market’ rates.

    I suppose most of the readers and writers in this blog are urban
    bases techies, (based in metros) and NRIs. There is a big and very
    different picture in the mofussil towns and villgaes. It has nothing
    to do with demand and supply. For e.g in my hometown Karur, new
    plots and layouts can accomodate more than double of present population
    but like a musical chari game speculators exchange ‘papers’ (with power
    of attorney). no real construction gets done unlike the metros.

    i have seen some of the real estate properties rear the so called
    “Little Japan” area of Sriperumbudur, Chennai. it is in the middle
    of no where and even in 15 years no idiot will want to live there.
    most of the employees of Hyndai, Nokia and other IT cos commute
    by prvt and company vehicles from city…
    but already the layouts are there and quoting in millions.
    crazy deals and market in not rational while we try to
    rationalise it.

    Comment by Athiyaman.K.R — December 15, 2006 @ 7:36 am

38. Very interesting discussion indeed. Edward brings in a point - that this may not be a bubble, after all one knows only after a burst. I believe the scorching pace of growth in the past few years can be an indication of two things:

    a) A truly undervalued market that has received attention from foreign and institutional buyers who can see why it is undervalued when compared to their local experience.

    b) A speculatory push.

    The first one is pretty much like our stock markets, where unrecognised value was bought by institutions and the current liquidity excess has only pushed it forward. That’s not a bubble per se; even today the P/E of the most companies do not fully reflect their immediate growth potential.

    In real estate, things are very illiquid and unknown. Typically, a bust or even a minor downturn is recognisable only six months after it has begun, unlike the well-indexed stock markets. Therefore reactionary pressures and panic appear much later in the cycle, and the lack of transparency in prices pushes more fear, uncertainty and doubt into owners’ minds.

    The resulting downturn is akin to a “burst” and all that, but it’s not - it’s just a cyclical correction, one that we must see in order for this market to grow appropriately. The lack of healthy corrections, in my mind, is directly related to the lack of visibility into the sector (for the common investor). Therefore corrections hit harder than they should, and are typically seen as bubbles popping.

    And let’s also consider that lack of real estate is not an issue. Japan is dense. Yet, the property prices are not moving. You would imagine it would be otherwise.

    Apart from this, there are elements which are obvious are being overlooked when it comes to property. Cities are dense. And the new highways that are coming around have brought with them deregulation of the agriculture land zoning and removed ownership restrictions around these highways. It is now officially (endorsed by me, that is) faster to drive to Tumkur (60 km away) from my house (which is near the center of Bangalore) than to Electronic City or Whitefield (both 15-20 km away). The drive to Tumkur is great because of the fantastic (tolled) highway.

    The highways stretch from Chennai to Mumbai (through Bangalore), Mumbai to Delhi, Delhi to Kolkata and Kolkata to Chennai. These are like the state highways of the US. Then there are plans to do the north south road - Blore to Delhi and Mumbai to Kolkata. And eventually, there will be the grandiose idea of doing the freeways. (Note here that initially these four laned tolled highways were planned to be freeways, But the government chickened out of the borrowing and went for four-laning instead. Dumb idea, but we’ll take what we can get, thank you)

    At some point real estate on all the highway stretches will develop like crazy. And companies will begin to move too, and that will move a lot of the real estate out of the cities. I have travelled extensively by road in Karnataka and I can tell you this. Anyone that thinks India has a lack of space is off his knocker. There are dezoned, available, powered, watered, real estate available in all parts of the state (except the north eastern parts), and even in Kerala which is quite densely populated, there tons of dezoned areas available cheap. When cities start moving outwards, there will no “lack of supply”.

    Many developers say “God stopped creating more real estate, but hasn’t stopped creating people”, which is only true if you replace the word “people” with “cockroaches”. We aren’t anywhere close to what you might call “mildly dense” in comparison with our available real estate (NOT including the 28% of forested land and the agricultural lands)

    So if available real estate is not a problem, what is? Water, power and sanitation is one, but those can be solved relatively easily if there is impetus (of the type hitherto practised by a Mr. Chandrababu Naidu, perhaps) Also lack of investment - the number of quality real estate developers are finger-countable. Again, that’s bound to change with all sorts of organised money being allowed to move in. And then there is regulation. That will be the toughest to change.

    Oh and coming up: Cement and Steel prices are going to cool down in the next two years. THe cost of construction will perhaps come down to Rs. 1000 per sq. ft. or lower. That means prices of new apartments will likely be lower after two years, if land tracts aren’t much more expensive. What will developers do? Probably try to pipe in gas or do the interiors well. (in Bangalore they give you a tacky shell. In Gurgaon they know how to sell flats) Perhaps even fit in industrial driers and washing machines in special rooms. And provide A/Cs, security devices etc. What will that do to prices and rents of existing apartments which don’t have this stuff?

    Comment by Deepak Shenoy — December 15, 2006 @ 10:53 am

39. I did a small blog post on the same recently, http://anthonysmirror.blogspot.com/2006/11/will-real-estate-bring-down-indias.html … The price escalation is not quite a case of speculation even though the quantum of price escalation in such short duration looks very much like the symptom of a bubble.

    It it were speculation, it is speculation of another type. It is not Home Buyers spculating but the developers speculating buy paying such outrageous amount for Land…

    Comment by tony — December 15, 2006 @ 12:46 pm

40. All said and done, I’ve already made substantial money in the real estate market ! The important thing is to make money while the bubble lasts, and not theorize, analyse and procastinate…

    Comment by globetrotter — December 15, 2006 @ 12:55 pm

41. deepak
    japan had a huge real estate bubble in the late 80s and early 90s before the recession, economy had been deflationary for many years.

    Comment by krishna cherukuri — December 15, 2006 @ 12:59 pm

42. krishna, yes - but the lack of space argument still holds, no? People think that with limited space and demand outstripping supply, real estate prices can only go up. Not when you think of Japan. So there was a depression, but hte density has only increased hasn’t it? And that should mean higher prices for land, especially when loans are ultra cheap. Yet….

    Comment by Deepak Shenoy — December 15, 2006 @ 1:17 pm

43. I am from HYD and currently living in USA. I invested in five places of HYD from 1999 to 2006. My capital was Rs 85Lacs. The total value of my property now is 1.62crores. Do your homework, have local knowlegde, and then invest. In coming 5years, I strongly belive my property value will be 3.2crores.

    Comment by Vamshi — December 15, 2006 @ 3:33 pm

44. If you think Chennai is a bubble you need to see NCR the National Capital Region i.e Delhi and it’s satellite towns.

    Comment by Sridhar Jagannathan — December 15, 2006 @ 5:42 pm

45. globetrotter,
    arguments like yours lead me to beleive there is a bubble..here in the U.S. its called irrational exuberence.

    Comment by krishna cherukuri — December 15, 2006 @ 9:58 pm

46. deepak,
    population of japan has just grown by 4 million over the last 15 years and their population is trending downwards.
    http://www.stat.go.jp/English/data/handbook/c02cont.htm

    Comment by krishna cherukuri — December 15, 2006 @ 10:02 pm

47. in a inflationary economy (mainly due to govt deficts and monetising
    of deficts) there is a saying ” it is more profitable in speculation
    than in production “.. apt for India

    Comment by athiyaman — December 16, 2006 @ 11:42 am

48. Hi again.

    Lot’s more points.

    Balaji.

    I see you insist. Fair enough, but consider this, which I think must be the strongest argument about the use of the term bubble: that in the end you may convince people that really a bubble isn’t such a big deal, so why bother to do anything special to prevent one? What I mean is, that if all the things the wikipedia post claims as bubbles are bubbles, and the unwinding of them isn’t too painful, then mabye central bankers shouldn’t get hung up about them, since they aren’t such a big deal.

    Remember that the upside of the boom does have a lot of positive economic consequences apart from property developers getting rich. Lots of jobs are created, economic growth across the economy speeds up, there are secondary consumption consequences etc etc.

    Now if you could do all of this, and the downside damage wasn’t too severe, then clearly your ‘bubbles’ would not be such a bad thing (since the pluses would be greater than the minuses - the developers who go bust after the burst for eg). So perhaps central bankers shouldn’t be so vigilant about bubbles?

    Now of course I am not saying this. I think you have to be very careful indeed about handling bubbles, but then, if this is the case, you need a reasonably precise definition of what it is you are dealing with.

    You see the decision is never an easy one. The main policy tool for dealing with excesses in general is interest rates, but don’t ever think that these decisions are easy ones, there are ALWAYS pluses and minuses. In layman’s terms - as Annamalai puts it - the central problem is one of the trade off between jobs and inflation. Lower interest rates obviously mean more jobs in the short term, but then you always have to look at the possible consequences in the longer term. In a country like India where you still have children dying of malnutrition in large numbers in the North noone would want to take this lightly. Clearly there are pressing reasons why India should grow as fast as it can, but then you need also to think about possible future downside issues.

    Athiyaman.K.R

    “The last bubble in real estate in India peaked in Jan 96 and burst
    soon. Lot of specultaors who had borrowed heavily to play the
    musical chair game of real estate went bankrupt and it took many
    years for recovery. The situation was the same all over India from
    metros to small towns.”

    I don’t know anything like enough about Indian property to take any very firm stance on this, but I doubt this was really a bubble. It has all the signs of the typical boom with excesses, and it seems from what you say to have had all the unpleasant consequences for those in the industry after the boom ended. But what you really need to see is study of the general macro consequences for the whole economy afterwards. I am sure there were consequences, but just how big were they?

    Taking an example I do know a little about, the Spanish boom up to the olympics in 1992, this was most certainly not a bubble, since while there was a collapse in property prices after 1992 (which didn’t recover till 1995)Spain generally kept growing during the 1990s and the economy in fact performed rather well if you take the decade as a whole.

    Part of the issue in assessing the current situation with property (and it is this that gives the current global debate a lot of importance) is the presence of the so-called wealth effect. Simply put this is a process whereby home owners take on extra debt since they suddenly feel a lot richer since their home appears to be worth a lot more. It is this accumulation of non-property purchase debt that is the big issue. Clearly in Indian there is every sign that this is happening among some groups of people, which is why we are having this debate, since this is a relatively new phenomenon in India.

    And this brings us back to the whole debate about India’s consumption-driven model of growth. I somehow doubt that this model is sustainable in the way that the advocates imagine it is, since the ‘haves’ are such a small proportion of the entire population in relation to the ‘have nots’.

    But this doesn’t mean that you have to fear the worst. Basically in an economy demand has three components: private consumption, government consumption, and investment.

    Now there are arguments to be made - and this is what we are talking about here - that the first of these - consumer demand - may be pretty ‘maxed out’. It is hard to say, since as I am saying you need to consider the likely direction of global interest rates, and as a derivative of these the likely direction of Indian interest rates. This is what will tell you just how sustainable current prices, and continuing price rises, really are.

    But lets assume for the sake of argument that domestic consumption is now pushing against its short-term limits in India (the Economist sizzling growth argument).

    Then there is government consumption. Well we all know about the fiscal deficit problems. So it looks like government consumption expansion is going to be pretty restrained in the short term, since deficits have limits.

    But fortunately there is still investment, and this is where the debate is. Just how fast will invesment grow in India, and will India (as part of the normal demographic dividend process) now move towards a more investment driven model? Noone really knows, but my feeling is that there are grounds for thinking that it may well do. This would mean increased industrialization, more exports, and more integration with the whole global economy. If this happens then these urban enclaves we are talking about will be much more stable than many currently imagine. But, as I say, it depends. It depends on what happens next, and in some ways you need to start from this and work backwards. History here will be a poor guide.

    One last thing on bubbles and booms. I don’t think anyone should take Modigliani’s argument lightly. Houses ARE different from stocks, since people do tend to live in them. So this means that after any crash in values it is easier for the purchasers to sit it out, enjoy the pleasures of their newly acquired homes, and wait till prices resume their normal secular rise.

    It all depends on just how leveraged they are, just how much interest servicing costs rise, and just how much additional debt they have taken on. (Which is why rather than looking simply at house prices you need to also look at general credit exposure). This is very different from the property developers problem, since the developers normally find themselves overexposed (this is the so called animal spirits, or if you like ‘greed’, element, they always tend to go one bridge too far). The developer doesn’t really have anywhere to hide, since he or she can hardly enjoy the pleasures of living in an entire development lot, and there is always the bank chasing them for payment on the money they have borrowed to do the building in the first place.

    Interestingly, here in Spain, where the recent boom (or perhaps bubble, I will post on this separately in another moment) has lead to a huge growth in the construction industry, the builders are now frantically trying tpo diversify as the property market slows.

    The latest example is an attempt to buy-into the entire Italian motorway system, a move which the Prodi government in Italy is resisting, and the EU Commission in Brussels will have to decide on this in the end.

    They have also - surprise surprise - been buying into energy, and the recently inflated merger valuations for some of the key EU energy entities is in part due to money which is trying badly to get out of Spanish construction.

    OK, more on all of this as and when I find the time, since remember, it is time, not money, which is our big issue when all is said and done :).

    Comment by Edward — December 16, 2006 @ 11:48 am

49. Good point, Krishna. That may be the reason for the depression in Land prices? Lets see: I’ll compare it with Norway which is growing at about the same rate of population, but has seen a 10% or so growth in real estate prices.

    http://www.ssb.no/kt_en/
    http://en.wikipedia.org/wiki/Demographics_of_Norway

    The economy being deflationary is an impact in Japan, but the density of people being that high there doesn’t justify prices staying down. Only in the last few years has the market actually picked up!

    In India though, density is not an issue - we have a lot of land, a lot more than is forested or irrigable. In fact land banks outside cities are huge - just close to bangalore is the Hosur town in Tamil Nadu - what’s to stop the TN government from raking in the moolah by simply zoning right and paving roads (which is more than the karnataka govt. is doing?)

    I believe that corrections in prices are necessary, and are already happening in parts of the city. ANd perhaps the country. But will there be a big resounding across-the-country crash, like in the mid-90s? Right now, it looks impossible, because people are waiting on the sidelines with cash to invest. But crashes come exactly when you least expect them.My rule of thumb is: When 9 out of 10 people around you say “you can’t go wrong investing in ABCD”, it’s time to sell ABCD.

    Caveat: Regardless of what the market is like, there are always good deals. And good deals are always a matter of hindsight, so a buyer is either a visionary or plain lucky. Most like to believe they are the former, but the cynical me likes the latter designation.

    Comment by Deepak Shenoy — December 16, 2006 @ 4:22 pm

50. Ok, continuing on the theme of bubbles and potential bubbles, I’d like to take us for an excursion away from India and over to Europe. Basically I am suggesting this since Spain, Ireland and Greece, may well constitute the clearest cases at the moment of what *might* constitute bubbles.

    I order to get some background on Spain and Ireland may I direct you to Charles Gottlieb’s post on Brad Setser’s weblog. (Gottlieb doesn’t mention the Greek case since I suspect he doesn’t know much about it. Since this is also my situation, I will do likewise).

    Now Spain’s housing boom is a topic I know something about, since I live in Spain, and believe me hardly a day has gone by in recent years when I haven’t given some thought to this topic.

    Now let me say upfront that while I think he gives a good review of the issues, I don’t entirely convinced by the way that Gottlieb contextualizes what has been happening, and in particular when he says this:

    “Spain and Ireland both greatly benefited from low interest rates, from favourable migration dynamics, and their housing sector has both benefited from (and contributed to) strong local economic growth. By importing the credibility of the European Central Bank, they benefit from low nominal interest rates, in spite of their vivid growth and consequent higher than average inflation. Thus in addition to the global savings glut which exercised downward pressure on nominal interest rates, both countries exhibit very low real interest rates.”

    This is the general picture, but I would add some caveats. In the first place not only have real interest rates been very low, for a long time they were actually negative in these two countries since, here in Spain, for example, with the ECB rate pegged in the past at 2%, and people able to borrow at 1% over Euribor, or something in the 3.25 to 3.5% range, and inflation around 4%, obviously borrowing against property which was rising at circa 20% per year (and over 5 years) looked like a very attractive inflation hedge to say the least.

    Secondly I think it is important to add that Spain and Ireland have not only benefited from strong inward migration, the migration was actually PRODUCED by the housing and construction boom, since the rapidly growing economies needed a lot of additional labour. The migration has, in its turn, fueled to some extent the boom, but this is a secondary process, the main causal chain goes from construction boom to inward migration.

    To give you some idea of just how important this has been, Spain has had something like 5 million new migrants in 7 years, over an initial population of 40 million. That is, this has been very big.

    The other point is to understand how the low interest rate environment has been possible you need to think about the eurosystem, which provides the same rate for all eurozone economies, so, as a kind of rough and ready guide you could say that German savings have been paying for the Spanish boom in much the same way as Chinese savings have been making the US one possible.

    So now this brings us to the big question: is what is happening in Spain a bubble?

    Well I used to think it was, but I have now had second thoughts, and would say it might be. As you can imagine I am going to say it depends on what happens next. Basically I can see two possible scenarios here, a good one and a bad one. The key question in both cases is the future level of interest rates and the rates of economic growth.

    The Bad Scenario

    This involves Italy (remember the whole group of eurosystem countries are to some extent locked together), which has major public deficit problems (in the 105-110% of GDP range and increasing annually). Now Italy has a rapidly ageing and (ex-immigration) declining population with productivity flatlining. So basically either Italy can get its deficit under control or it can’t. I think Spain’s future (and that of eurozone interest rates) hangs on this question. If Italy cannot get the deficit under control it will eventually default on its government debt, and in defaulting it will send the whole eurobond system into chaos. This will immediately push up interest rates and place Spain, Greece, Ireland etc under very close scrutiny. Such a sudden and dramatic rise in interest rates would effectively blow-out the property markets. Then I think the whole Spanish banking system would take a very big hit, since the government would have no political alternative to intervening to reduce the capital values of the outstanding mortgages (this would need a law) as the young people who are already in up to their necks just couldn’t take the strain, and all the banks would be expected to take a very big haircut. This, as I have said, would be the very bad scenario, and illustrates just how dangerous bubbles can be (since in this case we would decide it had been a bubble I think). It is hard to see just how Spain would recover from this in the short term.

    The Good Scenario

    Under this scenario Italy manages to put its public finances in order, although remaining restricted to very low or even negative rates of growth (the ageing, declining population issue), the global savings glut continues, the eurozone continues to have very low interest rates, Japan doesn’t escape from deflation (yes, I am calling this the good scenario, but only for Spain).

    This would enable Spain to steadily move sideways out of an over-reliance on construction, whilst property prices stabilise and probably don’t rise above the rate of inflation. Under these circumstances it is reasonable to imagine that Spain could benefit from the growth take-off of Latin America. Existing migrants could move out of construction and into other low value occupations like retail, hotel and catering, heath and care of the elderly, while the professionals of the construction sector (logistics, engineers, architects etc) could all be redeployed in Latin America as could all the other utility sectors (electricity, gas, telephones) who have also been major beneficiaries of the boom. This would also have the advantage that it would address Spain’s whopping current account deficit (which is of course simply the other side of the construction boom).

    In this latter case there will have been no bubble, and everyone in Spain will live very happily for the time being. Since Greece has no way into Latin America (and since they are hardly likely to be able to leverage Turkey’s economic activity) I have no idea at all what they will do.

    I cite this case since I have no real idea which outcome to expect, so as you can see, I still can’t decide whether there is a bubble lying at the end of my nose or not.

    Comment by Edward — December 16, 2006 @ 5:29 pm

51. Is there a bubble in the Indian Real Estate? Yes. Every one accepts that. But is it a bubble? It should burst for us to know. Obviously when that happens there are going to be lots of people hurting.

    All the 49 comments above or rather before me were very educative for a uneconomic-bent minded person.

    It is not the investment and the yield. It is not due to the BPO persons who have access to new neo-rich ctc’s. (Well, that was a newest term came across, it means cost to company)in other words their salary/wage.

    It is not the hype in the media.
    It is not the humble womenfolk getting away from the kitchen’s and trying to make that extra rupee.

    It is a moral anchor.
    A house gives you that sense of belonging.
    A place where you can go and rest.
    You can share your times with the good and the bad and the ugly social members that you come across in your life.
    It is like that ‘feeling’ in your heart when you buy an ice cream to that ‘apple of your eye’. That investment on the instant gratification of your little one is beyond the yield and the savings. Saving though at that point of time is that beautiful emotion that you are filled in when your own parent bought you that chocolate and the ice cream.
    Yes. In India, they sell Ice creams. They also sell pizzas. Of course, women are raped, politicians kill, youngsters do drugs, and the IT and ITeS folk with the right skill set are doing generally fine in rupee terms.

    So the bottom line is not if it makes any sense to buy a house / flat / plot of land.

    Generations earlier, elders saved and bought land and built a house.
    Today they pledge their future and live-in and pay for their flat.
    And one only hopes they do not bicker tomorrow who owns it and who leaves it.

    Yes. If you understand that then you know that there is no bubble to B U R S T!

    You only have a home to relax in!

    Comment by Anil Atluri — December 17, 2006 @ 5:09 pm

52. Anil,

    Funnily enough, and perhaps without realising it, you have just summed up the rationale behind the modernization of the financial services industry, which is essentially that by using credit you can bring forward consumption. Now my feeling is that you don’t like this bit (and also maybe that you have an issue with those “IT and ITeS folk with the right skill set” you mention, who you don’t seem to especially admire) but leaving this on one side, don’t you see that many, many other people are doing far from alright at the present time (or were doing far from alright before India started to take off) so isn’t there some additional rationale for this process you don’t seem to like, if at the end of the day it gives you additional resources to address the problems which I am sure do interest you?

    Annan

    “If this is true should not the rents also be going up? Am I wrong when I say that?”

    Rents are really a separate issue, or at least in the short run they are. Rents will depend on the supply of and demand for rented property. If there is a lot of available property to rent (and indeed if the stock of this property is increasing as people ‘buy to then rent’) while the number of people looking for properties to rent go down since everyone wants to buy, then rents can fall as house prices rise.

    But if, as happened here in Barcelona, the construction boom drags in so many new workers looking for somewhere to live (and sharing 4 or 5 to a flat) at the same time as the stock of rental property goes down as almost everyone tried to sell, then rents can skyrocket, and if this happens at the same time as interest rates are in the 3.5% area, then the cost of renting can easily be higher than the cost of buying.

    This has been the situation here in Barcelona for about 5 years now. At some point this will rebalance itself, since in the long run it has to be cheaper to rent, but you can get huge distortions on the way. I don’t imagine it is too hard for someone to make a nice little mathematical model about all of this, which would depend on the number of young people wanting to go in as first time buyers, the number of extra migrants drawn in as you build each extra flat, the stock of existing properties to rent, the pass through rate of migrants from renters to property owners, and the number of migrants as co-owners of each new property (yes, some banks here accept up to five, to give the salary justification for the loan). Obviously you get a curve which has to peak somewhere or other along the line, and after that, it would seem that things could move down hill all the way.

    Now on what consumption you get out of your flat, I really have two things in mind:

    1/ There is a changing quality issue with property, 100sqM 20 years ago is NOT equivalent to 100 sqM today (number of bathrooms, kitchens, central heating, air conditioning etc) and you need to think about this when you measure house price inflation. I imagine most US indexes now take this into account, but I’m not at all sure the Indian ones do. You have to compare like with like.

    2/ But there is another issue, which may at this stage be much more a developed world one. The house is in many ways becoming much more the centre of family life again. This is a change between the industrial and the information economies. Instead of going out to a factory, one or both partners may now work from home. In addition child care practices may change (in the US the home education movement seems to be quite big). People may go out less to things like the cinema in the era of the internet and the home theatre.

    This is very anecdotal, but there are a thousand and one little things which make me think that people may now be getting more consumption out of their homes than they used to. But the big thing is they may now be trying to use the home as an individual pension fund. This would be a relatively new way of looking at the issue.

    Deepak,

    Very interesting points, nothing special to add except that you have obviously picked up the importance Japan has in all this.

    Comment by Edward — December 17, 2006 @ 7:06 pm

53. Interesting thoughts so far.

    In the midst of this conversation, I wonder we, Indians, do we really care about the P/E numbers or the inflation or GDP numbers to arrive a good valuation for an real estate property ? I guess, No. Many people who buy any house or land simply go with the group, just because “group” speculates that the price will skyrocket. Buyers,all they have is limited set of information and even the analysis done based on that information is minimal. So basically its joining the bandwagon which is overheating the realestate market. We Indians don’t have proper tools and information to arrive at a “good” valuation for real estate.

    I also feel what applies to the markets like US or Japan, doesn’t apply to Indian market, atleast not to a full extent.So I feel the over heating is more to do with “belief” rather than the actual data. We can guess the future results, in case if we don’t do our homework.

    Comment by Harish Babu — December 18, 2006 @ 4:50 am

54. Pls pls…. someone talk abt Money supply growth of 20% in india ;-)

    other arguments are a waste of time.

    Comment by Dr. Dan — December 18, 2006 @ 6:39 pm

55. [...] Re: Underdog Team CAT 2006 GD/PI Prep Did google for a lot of info… 3.How is black money good for the economy in the long run? From what I searched: One thing that’s common to most cases with the black market is the real estate sector. Huge amounts of black money has been pushed to sectors like real estate. And now a lot of money/surplus has been an impetus for prices in the real estate sector to rise. Even though the price could be paid in cash as in the market value of the property, in order to avoid taxes on stamp paper or other govt levied taxes one would deal in black money, ergo fuelling the demand for "hot" real estate properties. Spanish and India have been quoted as examples. Increase in prices of real estate means more demand for sectors/products/services related to realty. Like steel,cement and credit. As quoted here "A lot of distortions exist in Indian economy due totax evasion and black money, etc. Real estate is the safest and best place to park black money" Also my dumb reasoning: If there is huge amount of black money in the system it means that the govt. would initiate measures in order to sterilize black money. It may be in the form of : 1. Tax saving: a. By reducing the taxes b. Widening the areas through which one can save taxes like an ELSS, increasing STD. 2. Expenditure: By inducing expenditure on services/goods that would induce more expenditure in related areas which would cater to the process of diverting money into sectors that would eventually generate returns through the trickle down theory. 3. Price Rationalisation : Black market may induce people to relook at prices. If a product is supplied at a certain price through a controlled mechanism and if the product is available at a cheaper price in the black market, it may play a role in stabilizing the prices. If let say people evade octroi, and use black money or a bribe to get away, one may consider whether the amount of octroi incurred is reasonable or not….. 4.. The money is away from govt. hands, so would be better utilised 2.How can a blind man recognise the difference between bangkok & Kaula lumpur when stationed at those places? Is it Time? And now one can alos know if he is in Bangkok cause of the panic, either cause of the coup or the fact that their share market has just crashed by 10% [...]

    Pingback by Underdog Team CAT 2006 GD/PI Prep - Page 20 - PaGaLGuY.com Forums — December 19, 2006 @ 11:35 am

56. real estate price is reflected by the perceptIon of the economy which in turn is reflected on the stock market index.
    with the recent tightening on the fiscial freedom of the banks by the financial ministry to curb inflation the over bought stock market has begon to wobble.a dam will not break in go but undergoes a series of pulls which we will be seeing in our stock market.by 2 nd week of january 07 the index will be in the r
    ange of 9000.The real estae market is also going
    for a fall and by march 07 we will be in real estate recession.

    Comment by manojsai — December 19, 2006 @ 4:26 pm

57. [...] As for the asset markets – even after the run-up of the SENSEX, India’s market-cap to GDP ratio is still around 95%, which is lower than countries like South Korea (100%) and South Africa (240%), as well as developed capital markets (which range from 120% - 400%). Similarly, to summarize our earlier discussion, real estate has exhibited some disturbing trends in some regions, but on the whole, the jury’s still out on whether this means that it’s a nationwide price bubble. [...]

    Pingback by The Indian Economy Blog » The Indian Productivity Miracle — December 20, 2006 @ 12:13 am

58. I have recently moved to Hyderabad from US and am looking for a house/plot. I am shocked to see the prices and these do not make sense. I recently sold a house in US narrowly bucking the housing recession. I believe there is a lot of land in hyderabad but it is tied up by people who have invested in it. Everyone I know - friends and family own at least 2-3 plots/flats/houses in and around Hyderabad. The rent earned is not enough to cover the bank loans. For a person borrowing even 50 lakhs has to pay about 50,000 approx. a month in EMI (15 Years at 10%). Even in IT, I was told that the average salary is about 7 lakhs. The properties are not fuelled by a sense of “ownership” but more of investment.
    It is almost impossible for even a person earning 12 lakhs/year to own a decent flat close to the workplace (Mahdhapur, gacchibowli, hi-tech city etc) assuming they work in this area.
    Well, my search continues and I am seriously considering renting rather than owning. Even at 8% interest in FD, 50 lakhs will earn enough to rent a great place in likes of Juiblee Hills.

    Comment by Rajesh — December 23, 2006 @ 6:37 pm

59. See the question of return on real estate investment comes up for those people who actually are buying a second or a higher order house. The shortage of dwelling units in India is of the order of arounf 24 mn housing units. So long as everyone does not have one house per family, these kind of ‘over pricing’ and ‘bubble getting burst’ adjectives are not appropriate. It is only now that the salaries in metros etc. are shooting are people are able to OWN a shed over their at a much younger age than before.

    Comment by Shraddha Sawhney — December 26, 2006 @ 4:33 pm

60. I live in bay area. originally from coimbatore. India.
    I hear too much speculation in coimbatore. Mainly due to proposed/coming IT Park.
    Sad thing is, story is been there for more than 5 yrs. It has been built in to the current price of real estate more than once..

    1/100 th of an acre in Kaalapatti ( happening place in coimbatore, since IT park is coming close to this) is around 4-5 lakhs.
    1 acre is around 4 crores (1 mil $).

    In East Bay, Going rate for 1/2 acre is around 500-600k $. Location is close to Public transportation. Good location, schools.Freeways.
    Obviouly, there are more Tech jobs here than any time we will have that type of tech jobs in cbe(though I wish it will be).

    Considering these, it is unbeleivably pricey in coimbatore.As it’s been discussed, rents will never be able to cover the appreciation values in coimbatore (at the least).

    Comment by thirupathi — January 3, 2007 @ 4:23 am

61. A very simple solution exists to pop the real-estate bubble (this is possible only for real-estate as an asset, not other assets). Implement the georgist idea of taxing ground rent. Ground rent is the rent ofthe plot alone, not including the house. Ground rent is a transperent source of taxation when compared to income, sales, excise, etc. The government can publish rates of taxation on the web. Anyone who holds land for speculative or black money reasons will face an enormous rise in carrying cost. Whether the plot is bought with black , white or pink money, they will have to pay the tax, because any simpleton with a 8th grade education can look at the map and find out which “plots” (note, plots not people) have not paid their dues. Auditing can be so simple. George had suggested near 100%, a smaller figure like 30% (of annualised ground rent, not 30% of value of plot) is enough to burst the bubble.

    At the same time, landowners who try to pass this to their tenants will face problems in getting tenants. People who ahve speculatively kept plots of precious land empty will have to use it, sell to someone who can use it, or pay the dues. Any of the first 2 scenarios is good for the real-estate market in bringing in more supply and the 3rd one helps reduce the fiscal deficit.

    The fiscal deficit can be eliminated and after that, income and sales taxes can be reduced(taxes which are more subjective and difficult to administer compared to ground rent) Maybe, the much vaunted investment increase in investment in education, health, sanitation and infrastructure can be done. If the fiscal deficit is removed and the debt paid off, no reason would arise for printing money, helping curb inflation in the long run.

    Comment by Prakash — January 3, 2007 @ 2:30 pm

62. The last suggestion was pretty interesting. But, do we have a computerized record of all the plots & properties in India. I guess if we have that a lot of property problems would be solved & if we implement some kind of a moderate taxation a lot of that property would be developed. Those who hold up the plots be punished for slowing down the economy and making India lose on opportunity costs.

    Comment by Balaji Viswanathan — January 4, 2007 @ 5:45 am

63. Are you all aware of Tulip Mania of 1636 AD?

    What is going on in India is the same kind of mania.
    No doubt, there are so many positives about Indian Economy that justify the boom in Real Estate, but upto what extent is the question.

    I keep a close watch on the market, because it is my job also, and I can say about 90% of transactions are investment based. it is only 10%, that people buy to consume. Greater fools theory is what dominates the market today.

    Take it from me, this boom does not make sense, and it does not last.

    Comment by Srinivas Mamidi — January 4, 2007 @ 8:01 am

64. My experience says its a speculative bubble.

    There was this new construction in Pune where I was looking to buy in Jan 05. Called up the builder, and got on his list for a price of 2700/sq. ft. Next I keep getting calls from this fellow - the price is now 2900/sq. ft., oh now the price is 3200, by the time I walked away he was up to 3500/sq. ft. All of this in less than a months time for new construction to be delivered in 07.

    Comment by Vera — January 4, 2007 @ 10:43 am

65. [...] Indian Economy had a very good post on the real estate scenario sometime back. [...]

    Pingback by Prabu Karthik’s Viewfinder » Blog Archive » Real Estate in Coimbatore — January 4, 2007 @ 11:22 am

66. If there is a change in the tax laws of India where house loans on non-primary homes lose their tax deductability, then there could be a correction in the house prices.

    Comment by MumbaiKar — January 5, 2007 @ 7:07 am

67. Residential prices in Gurgaon have tripled in the last 2 years! Probably in this area it can be understood due to the high density of offices populated with MNC’s doling out fat salary packages to double income couples. This has led to a shortfall in quality housing in the city and thus the high price appreciation. The rentals howevere continue to remain low.

    Comment by Anil — January 5, 2007 @ 8:15 pm

68. Interesting discussion indeed…
    1. What is the percentage of people who have bought properties in India on loans
    vs. their savings ? And what percentage of loan they have taken ?

    e.g. If an NRI purchases a property worth 50 lakhs in India, will he take loan
    of 40 Lakhs or 20 Lakhs and balance from his/her savings ?

    Its important, because the EMI for the loan amount will be low, about the same
    as what he/she will as rent of the property.

    Plus, if more money has come from savings - why will he/she sell it even if
    market takes some dip - there is no need for him/her to panic

    2. Let’s say, new person who moves to Bangalore - will he/she rent for 20,000
    or buy it for 50 Lakhs. What if he/she has savings of say 20 Lakhs. Then what
    will make more sense ?

    3. Now let’s add the people who have black money(corrupt govt. officials, Lawyers, Docs, even small businesses), along with NRIs with fat savings.

    When/why will these people sell their properties? What is good return on their
    investments ?

    4. Let’s take example of HSR Layout in bangalore, accessibility to Electronic
    City is such a big big plus for a person who works there. Ask someone who has
    worked there and has commuted to ECity - and it will be true even tomorrow when
    bangalore metro comes up and bangalore expressway comes up…

    5. See stock market - it came down to 9000, and after enough
    profit booking and taking the weak hands out it went back to 14000.. will it
    again go down.. may be .. but it won’t stay down for long given the GDP growth
    (actual and projections) - Same thing will happen in Real Estate - we have
    same players in this sector too.

    So is it bubble? May be (but definitely not in every area in every city)? Is it going to burst - (no soft landing) less likely - because 1.there is demand 2. Assuming that % of borrowing against the real estate is low - the rent received
    is taking care of EMIs. So they are in no hurry to sell. Just my point.

    A rookie(even that is a superlative)in economics .. just some chicken scratch in this gr8 discussion… Thanks guys..

    Sunil

    Comment by sunil — January 9, 2007 @ 1:19 am

69. One thing people are not taking into consideration is the job market. As long as the job market is stable, people might be able to afford to pay mortgages. But the current indian IT salary is pretty high compared to other developing countries. When they catch up, India is in trouble. Some of the companies that I personally deal with in USA have been moving away from India because of cost. When the US economy slows, jobs may move away from India as well eventually and thats when we will see a major breakdown in real estate market. This market is definitely over heated and there is definitely a bubble.

    Comment by Sandeep — January 9, 2007 @ 5:27 pm

70. Here is one of the blog i penned. I live in United States and originally from hyderabad.

    http://www.gruhalaxmi.com/articles/52/1/Is-real-estate-boom-good-for-India.html

    Comment by sri — January 10, 2007 @ 12:57 am

71. Adding to sandeep’s comments..

    Indian offshore worker costs 25-30 dollars. I had seen it for 27+$..
    straight comparison in us is around 55k. Though it doesn’t include office space etc.

    in essence, cost between US worker and Indian IT worker is closing in..I m not comaring the prj. mgt and other things that come along with 27$/hr rate.
    still it may not be that tough to get a 27$/hr worker in mid western states as IT beginner..

    Add to that dollar is depreciating..

    Comment by thirupathi — January 10, 2007 @ 1:33 am

72. I am deviating a bit from economics..

    Desire to own a house ‘at any cost’ has another social/religious angle too.. which may be unique to India.. This may be another reason why the prices are going up.. ???

    Many land lords won’t rent you their properties if you have old people in your family e.g. If your father is hospitalized in Bangalore and you are staying in a rented house, the society/land lord will inform you not to bring the dead body to the house - remember that your father is just hospitalized and he is still alive..
    I was a witness to this incident..

    That’s how I bought a property in BLR and no other reason :-(

    Comment by Raghu — January 10, 2007 @ 1:12 pm

73. It is the inherent risk in any market that one should bear in mind while investing- markets can go up or come down!. Afterall in this speculative market we are all hoping that someone else will buy at a higher price and that “someone else” will hope that someone else will buy for a still higher price. Let us be fair a lot many of us are guided by what stories (some real and some assumed) we hear, read and see. We are all hoping that everyone is right so that we are seen to have taken the correct decision and not look like a fool! As for a bubble Well as long as there is demand there is supply and the mismatch create the profits so enjoy the party while it lasts!

    Comment by Rajesh — January 11, 2007 @ 12:45 pm

74. For some of us, there is good news at last. Check this out:
    http://economictimes.indiatimes.com/Markets/Real_Estate/Residential/Heats_off_residential_prices/articleshow/1174519.cms

    Comment by Sandeep — January 16, 2007 @ 7:25 pm

75. The under current is very strong and bulish for the long run. The amount of NRI money and black money is so enormous, that it can faulter any sensible economic prediction. I bought land in Ahmedabad out skirt at 37 laks 3.5 years back. I sold it recently in 7.5 cr for one departmental store chain. The return is mind bogling and the same land is worth 12 crores now.
    Always listen to the people who has actually invested in earn/loss. Thats the real life story….
    Good luck and happy investing. After all everything is spoken in the name. “REAL ESTATE”

    Comment by Rajesh Patel — January 18, 2007 @ 2:53 am

76. Rajesh, the returns have been awesome but now it has reached unsustainable levels. Also, it is a bad idea to have herd mentality as far as investments go.

    Comment by Sandeep — January 18, 2007 @ 7:47 pm

77. […] As for the asset markets – even after the run-up of the SENSEX, India’s market-cap to GDP ratio is still around 95%, which is lower than countries like South Korea (100%) and South Africa (240%), as well as developed capital markets (which range from 120% - 400%). Similarly, to summarize our earlier discussion, real estate has exhibited some disturbing trends in some regions, but on the whole, the jury’s still out on whether this means that it’s a nationwide price bubble. […]

    whoever said the above statement, it is a wrong metric to look at when understanding the valuation of any equity market. ex: If sensex reaches 200% market-cap to GDP ratio this year..that means the average PE of indian equities would be around 45-50, which is a dangerous level. MarketCap is equal to total earnings of all listed companies * avg. PE of the market, not at all corelated to GDP. The PE ratio is a much better multiple that hints you if a market is over-valued. Indian equities has to consistently deliver earnings growth north of 15-20% for the next 203 yrs to even justify the current PE multiple. Our PE multiple is higher than china and south-korea, which means there’s lot of froth in our valuations. There sre certain set of companies who’re delivering higher earnings growth (in the order of 30%) which deserve a higher PE. but, earnings for 70% of indian equities (ex: Cement, Metals.etc) are tied to GDP growth which means these companies were just riding on the wave of good companies and would take a hard-hit once realities set in.

    Comment by Krishna Moturi — January 19, 2007 @ 9:46 am

78. Actually it is all stupidity. Plain stupidity. Nothing else. People buy land at very high rates only because they think they can sell it at even higher rates and make money. It is all based on rumours and greed. Just gambling. Speculation. Not real analysis of any sort. It is very similar to IT bubble. At that time, there were large number of idiots (a.k.a. “investors”) who were willing to pay hundreds of millions of dollars for a simple web-site run from a home. You see, this is all just stupidity. It is like Multi-level marketing. Those who sell will make money. But the people at the bottom of the pyramid, who will be stuck with overrated lands with no one ready to buy. However people at the top or the middle of the pyramid will make money. Everyone hopes to be at the top of the pyramid.

    Comment by Thinker — January 29, 2007 @ 10:58 am

79. http://economictimes.indiatimes.com/Markets/Real_Estate/Residential/Heats_off_residential_prices/articleshow/1174519.cms

    Forget red hot real estate. Over the last three months, there has been a 15-20% price correction in the market
    After tracking capital values in three metros like Delhi, Mumbai and Bangalore the end result was that either there has been a fall in the prices of the residential values or they have not increased in last three months. Prime areas in Delhi like Friends Colony, Maharani Bagh, GK I &II, Prithviraj Road and Hauz Khas have witnessed a 5 to 10% fall in the prices of residential values.

    In Mumbai, prices at Colaba, Cuffe Parade, Central Worli, Bandra and Juhu have remained stable in the last three months. The story is the same in Bangalore where the market has not witnessed an increase in the last one quarter (October-December) while there was 10 to 15% increase in the last quarter (July-September).

    Comment by admin — January 30, 2007 @ 6:11 pm

80. http://timesofindia.indiatimes.com/articleshow/1859800.cms
    The Reserve Bank of India is worried about a bubble in real estate that may burst. Property prices have doubled or tripled in the last two years, although rents have risen only slowly.

    The slow rise of rents suggests that the demand of actual users is being met. In which case the frenzy in the market looks a speculative bubble.

    Comment by admin — January 30, 2007 @ 6:14 pm

81. http://money.cnn.com/magazines/fortune/fortune_archive/2006/07/10/8380919/index.htm

    “There are a couple of hundred malls currently being developed across India, and predictions are that only 10% will be successful. Yet every developer feels his mall will be among the survivors.”

    Comment by admin — January 30, 2007 @ 6:17 pm

82. http://www.thehindubusinessline.com/mentor/2005/07/04/stories/2005070400591000.htm

    Wafers believed that in India house prices were getting unrealistic. She remembered her friend from Hyderabad. He had said that a flat which fetched a monthly rent of Rs 7000 cost Rs 25 lakh. The EMI (Equated Monthly Instalment) on a 15-year loan of Rs 20 lakh for that flat worked out to Rs 18,000. Surely it made more sense to rent than to buy a house. Many people were buying property, in the hope of capital appreciation. Her friend had argued that people were looking at housing less as a place to live in and more as an investment. If selling pressures increased as investors tried to book profits, the bubble might well and truly burst. If that happened, the consequences can be catastrophic.

    Comment by admin — January 30, 2007 @ 6:31 pm

83. The property bubble has started bursting in Chandigarh’s periphery spreading panic among the builders, property consultants and investors.
    http://www.tribuneindia.com/2006/20060520/real.htm#4

    Nearly six months ago, the city’s periphery was literally a hot property with transactions, particularly one piece of land changing hands several times, a routine affair. In fact, the going is getting tough for consultants and investors with no hope of revival of the real estate boom witnessed in the past couple of years.

    Comment by admin — January 30, 2007 @ 6:39 pm