I received an email from a gentleman named Annamalai Veerappan recently which raised some interesting questions that I am not qualified to answer. I’m posting his entire email here, in the hope that IEB readers will pitch in.
I’ve been following the US housing bubble for the past 2 years and it’s been amazing. How people think and talk when the bubble is happening. I was not following so closely when the dotcom bubble happened in late 1990′s.
I’ve also been following Indian real estate to whatever extent I can through the web and through some personal and phone conversations (I’m living in the US).
I’v heard and read reports about 5-15 times increase in land prices in Coimbatore, 1.5 crore apartments in Mumbai, 10% increase in apartment price every week in Hyderabad, Rs.27 Lakh apartments in Chennai (which will yield at the max Rs 7,000 in rent per month), Rs 50,00,000 apartment in Pune.
The whole media is touting this as one of the best things to happen to India and there is not much discussion on the Indian blogosphere (as far as I have searched).
More than this being a good thing, could it be a bubble? Why have I not heard the word ‘bubble’ and ‘Indian real estate’ together?
Being in the midst of a bursting housing bubble in US I sat down and came up with a rough calculation….
Residential Apartment in Velachery (close to IT shops): ~1000 sq.ft
Cost: Rs 27,00,000
Interest Rate: 8%
Interest Cost: Rs 2,16,000 per year
Tax Cost: Rs 4,000 per year
Total Cost of owning the house: Rs 2,20,000 per year
Rent per month: Rs 7,000
Rent per year: Rs 84,000
Total earnings from the house: Rs 84,000 per year
Without deducting maintenance costs the percentage of returns on this investment will be 3.11% (less than inflation).
For this investment to make any sense, the rental value of the apartment should go to Rs 20,000 per month (Rs 2,40,000 per year). This is completely absurd as this is not going to happen (even the person who bought this apartment scoffed when I mentioned it).
The only option for this scenario to make sense is for the apartment value to come down, which means it is a bubble.
The buyer of this apartment is actually betting on the price appreciation of the apartment rather than the rental income (This is pretty similar to the greater fool theory).
Am I missing something, or is the whole Indian media and blogosphere missing something?
Comments open, do go ahead!