The Indian Economy Blog

December 13, 2006

Is There A Bubble In Indian Real Estate?

Filed under: Miscellaneous — Amit Varma @ 11:53 pm

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!


  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:

    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.

    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
    – 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.
    Prices can grow and still take a longer time for the rental curve to meet the price curve
    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.


    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.

    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.


    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 may help – search for the same area, sale and rental values.

    A link that may be useful:

    “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: 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.

    Grobal housing scenarios and bubbles:

    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.


    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, … 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 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.

    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.


    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.


    “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.

    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?


    “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.


    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 - 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 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..


    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.

    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:

    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


    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

    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


    “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


    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.

    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


    While foreign investors seem to be making a beeline for property in India, HDFC Chairman Deepak Parekh believes real estate is overpriced.

    I was in Bangalore recently. Developers tell me they see a slowdown in sales and a dip in commercial and residential property prices varying between 10-30 per cent in Whitefield, which is a growing suburb. I would say this is the beginning, it’s not a bubble.

    A correction is necessary and further increases are unlikely to happen. Even if your cost of construction goes up, you will not be able to pass it on because you have inflated land prices.

    Comment by admin — January 30, 2007 @ 6:43 pm


    The Economist magazine said that “the worldwide rise in house prices is the biggest bubble in history” [1], and real estate bubbles are believed to exist in many parts of the world, especially in many areas of the United States, Great Britain, Australia, New Zealand, Ireland, Spain, South Africa, India and China.

    Comment by admin — January 30, 2007 @ 6:48 pm

  86. I think the prices in India are inflated to benefit the real estate mafia and investors. Majority of the real honest people investing cannot afford these prices which are through the roof in most cities.
    The one factor that affects the affordability though is the pooling of funds in families to buy properties. Everyone knows prices are going up in the short term.

    Since the real estate market in India is largely unregulated and ruled by the mafia they will continue to inflate the prices and scarcity will continue to push prices up. If someone in the government has the guts to step up and regulate the market a bit like in the USA and develop infrastructure outside the cities , I think we will see a correction. Its unlikely that this will happen in the short term so for now its like the wild west and one can make a lot of money by being opportunistic. Lets face it we as Indian citizens have always taken advatage of our position to marginalize the poor so making home owning even difficult for them is an easy one if we get our ROI.

    Comment by Ravi K — January 30, 2007 @ 11:35 pm

  87. One more factor to be considered is the difference in the inflated rates the newspapers quote (sure it helps the advertising revenues from the apartment builders) and what is really happening at the ground level. In Mysore, the rates mentioned by the them are nearly 100 to 150% more than what is currently available.

    A seller always looks for an outstation buyer – be he an NRI or a guy from some other place – who is not well versed with the local reality of realty, so that he can palm off at a higher price. Just pick up an old copy of ‘Free Ads’ and you see the same guys advertising today what they were trying to sell one year back.

    Buying a piece of property is just like stock market – you do not buy what the monday edition of ‘Investor’s World,’ financial magazines (Dalal Street journal, Capital Market et al) or the experts on CNBC tell you. You have to do your own investigations and -in case of real estate investment- it involves lot of roaming around in the hot sun, which is something most people do not like.


    Comment by Jayant Kamath — February 1, 2007 @ 9:03 am

  88. Excellent discussion. I’m currently debating a purchase of property in Chennai since I’m going back to India for good (from USA). I’ve been doing lot of reading and research. With all this IT corridors, expressways, real estate ads, gated communities etc. I’ve also been visiting Chennai every year for the last 13 years. Here’s my scoop what’s real and what’s speculation.
    1. It is true that Indian economy is growing and its effects are visible not only on the streets but also on the mindsets of day-to-day people like postman, milkman, temple priest etc.
    2. State government is doing it part in identifying a chunk of land to develop satellite townships and providing power, water etc. For some reasn sewage is always the last one. It is always unfairly down in the list of priorities.
    3. Unregulated real estate players exist at large planting false stories about new malls, new schools etc. which don’t exist yet.
    The price/sq ft is going up as if that this is the last chance. People who are pushing these prices seem to have mastered this art very well. They have infact gone tech savvy by creating blogs about how easy you can make money in real estate. Be careful about such campaigns.
    4. Large companies are buying land in these state alotted lands BUT NOT YET doing anything with them. They want to wait for change in governments etc. before depending on the government. This means the corporate world is doing a wait and watch on real estate.
    5. One major point is that good schools still exists in chennai city ONLY. The so called real estate boom areas do not have any good schools. They have these govt panchayat schools only.
    6. I’ve experienced the 1996 real estate bust in chennai. Based on that I can easily say that the prices are highly valued.
    Too costly!!!

    Comment by Kishore — February 4, 2007 @ 5:32 pm

  89. I’ve been Watching the Indian real estate market closely for a while. I believe it is not now thatthe rent/buy cost does not match. 15 years back we bought an Apt in T.Nagar(800 sqft), Chennai for 8L and the intrest rate in Lic housing loan for 2,50,000 was 2300.00/month. The rent we got at that time was 4500.00/month. SO assuming we borrow the whole amount, the intrest and the rent will have a big difference. That Flat was appreciated to 10L after 3 years and then in the down period, when we tried to sell, depreciation was calulated and we were offered a price of 4L. So we just postponded the selling idea. Now in the boom the Flat is being offered 20L.
    We have to see that the Apart from the NRI money only 10% of people can offer houses more than 20L. Still more than 60% of Indians don’t have own house. As the Indian economy is doing good, the boom might continue for a while. The real estate market will stabilize in the next few years but will not come down drastically.

    Comment by ValliammaiPalaniyappan — February 6, 2007 @ 8:07 pm

  90. The Real Estate Bubble in India is a consequence of deep reduction in interest rates on Housing loans between 2001 and 2004. With rising inflation, we can confidently say that Home Loan rates will head towards 12$ and even 14% levels in the next 1-2 years. This will automatically cool the Real estate and bring down the property prices to saner levels.

    And talking specifically about Chennai, it is widely ignored that Chennai’s Real Estate has had a bull run partly due to the easing of water shortages that the city is notorious for. Chennai received a lucky shot of two successive years of excessive rainfall, helping it overcome the watershortages and this has reduced the discounting Chennai Real Estate had earlier (relative to other Indian Metros). This may not be a sustainable advantage.

    Comment by Ramki — February 10, 2007 @ 11:12 pm

  91. Rental markets are inversely related to real estate price appreciation. One can tell that’s not true, but take US market as an example for now, as the prices of houses are going down, the rental market is going up. So in India if the rental market goes up in relatively lesser phase (to adjust inflation) is a perfect math. If I can afford to buy a house then why shall I rent that’s how the market at the ground level moves.

    Yes, India is growing at 7% over a quite some time. But during those phases, people were trying to adjust to learn and explore the opportunities. Initially people preferred a big home with big family. But now the western independency culture is inspiring the youth and with men and women driving the wheels, more demand of independent houses are increasing. People are very open to move and reestablish; this is also driving factor.

    As per the latest data, it is not only the local funds but international funds are also a big driving factor. So obliviously the US$ valuation and the Home countries economies will indicate the price trend in future.

    About the bubble, anything which goes up has to come down, but how much and when it’s a big question. But currently we cannot tell it’s a bubble and it looks that this investment will still have an uptrend for atleast 10 years down the line. And then it will stabilize.

    Comment by Bharat — February 13, 2007 @ 5:20 am

  92. There are presently three drivers of the land boom
    1. the pursuit of industrialisation driving land acquisitions in every state
    2. The drive for commercial real estate driving land prices high since malls are a craze nowadays and everyone who has land thinks of setting up a mall
    3. the need for commercial spaces for offices which is causing office rents to move up – Read BPO and IT services drivers

    Cement and steel prices are high, so cost of construction is definitely higher now than before

    Interest rates are low, but for a resi prop developer this has never been a problem since most flats are always presold through slab payments. Working capital costs are lowered but the land acquisition premiums take away any benefits on this account

    Demand conditions for real estate are great. Young populaion. nuclear households and early income earners

    With average age of borrower coming down, average loan values are increasing since there is a longer economic life for the borrower. Dual earning capacity only adds to the attraction

    Given this it is not surprising to see real estate demand peaking and property sellers positioning themselves as luxury property developers to get the share of aspiration value.

    The argument on cash flow yield of a property is interesting. However, a second property also allows one to claim loss from property (as opposed to income from property)which can be set off against salary income so the cash flow yield will actually be higher due to this.

    The Black money argument is also a good one to explain property price boom. Given the stringent measures on black money generation bank transaction taxes etc, increasing no of services being brought within the tax net, parking cash in property is often considered a safe bet. Parking money in other asset classes requires too many know your client processes – MAPIN, PAN etc etc for Demat, mutual funds, ipos etc. My sense is it is only a matter of time before the loose ends in real estate as an asset class is tied up. May be the only alternative for a black money generator would be the bearer cheque transactions which means no money is transacted but only the right to encash is transacted as exchange value. this off course is outside the subject

    What can cause the boom to end – Rising interest rates. ICICI Bank is raising it every 6 mths and nothing can be more distressing for a buyer and seller. If interest rates rise, people sitting on floating rate loans or floating fixed rate loans will either see their emis going higher or no of installments increasing. This increases default chances on loans as well since general cost of other items in the consumption basket also increases

    For a new borrower this reduces the budget of the house he would like to take since for the maximum tenor, the emi amount would increase. People buy houses based on their current income profile and modest assumptions on increases. Indians are genereally debt averse and do not factor in very aggressive assumptions on income growthn (I think)

    Tightening of disclosure needs will also improve transparency in prporty dealins and may quell the boom a bit

    My two bits to the discussion. This is a very interesting debate. Incidentally in the US companies have just started providing heavily on mortgages. Watchout for that in India

    Comment by Raghu — February 13, 2007 @ 1:39 pm

  93. This point might have been mentioned before but if the focus of development shifts from cities to less developed areas this would mean atleast a shift in the appreciation from cities to more rural areas. This seems the most logical shift and may be better for India. The factor that works against this is that a large part of India is still agricultural and this may in fact hinder development outside the cities. I think its for the Government time to shift the focus from the cities to Villages and this may have many more positive implications including stabilization/correction of real eastate prices

    Comment by Ravi K — February 13, 2007 @ 11:35 pm

  94. I feel one can’t rely solely on number crunching in today’s fastest growing markets, to determine asset bubbles, especially in real estate. In addition to India, there is similar RE appreciation in Russia, China, and Brazil. And this situation will continue in India, because the economic growth is not going to slow down (despite nay-sayers), due to the factors we all know, including market size, demographics, investment, TFP, inherent people skills, middle class growth, etc. I have invested substantial amounts in Delhi RE and researched the market for years, so know the returns and potential intimately. A top class apartment there now is $1 million (that’s right, 4.5 crore!), and believe me supply is still short and rents are increasing rapidly. Influx of NRI money (like myself), political capital, MNCs, highly paid executives, and booming middle class will continue fueling RE prices, for the foreseeable future, particularly in prime areas.

    Comment by Neal — February 15, 2007 @ 4:04 am

  95. Friends,
    I read all the above comments and thanks to everyone who gave their advice backed by strong logic. The logic from both people ( bubble busters and boomers) is so strong that I am clueless. With highly inflated price values in Hyderabad, 32Lakhs for 2 BR Apt in Malakpet earning 2500 Rs per Month as Rent, should I buy a home/Apartment/plot in this market? Should I wait?
    I am an NRI and will only be able to buy usin NRI Loan coupled with 20% downpayment.
    Thanks alot in advance

    Comment by Mad4Cash — February 16, 2007 @ 9:42 pm

  96. mad4cash, not an advice. just for the argument.. this doesn’t seem to be wise, if I have to put that money.
    Though I had never been to Hyd. NRI for past 9 yrs.
    Based on your 20% downpayment route, unless you want a House for your parents to live, this doesn’t seem to generate enough rent to make a dent in your EMI/loan payment..

    Comment by thirupathu — February 17, 2007 @ 6:03 am

  97. Just FYI:

    All the above links(and many more..) talks about sudden interest rate hikes in home loans, which is the main source of money for majority of home buyers. Definitely the new home buyers would think ten times now before taking a loan for 32 Lac 2BHK house and at the same time the medium sized home owner, frustrated with the increase in number of years for their EMIs would think of selling off the house.

    With this definitely the residential real estate market is going to get a hit. New buyers should just wait and watch. Whatever goes up, comes down and now its time to come down.

    Comment by Mit — February 19, 2007 @ 4:15 pm

  98. Prices have already started to comedown , right time to sell the invested properties at the peak now and cling on to the one you plan to reside in , better yet you can short it as well.

    Seriously this overheated market had to go down,I mean these insane prices were dependent on banking loans leading to inflation a bloody pizza in pizza hut costs 200Rs that like more than th aaverage salary of an Indian.It was long overdue… the interest rake hikes.

    Comment by Judge — February 20, 2007 @ 9:59 am

  99. I mean the price of the Pizza is 2000.

    Comment by Judge — February 20, 2007 @ 10:05 am

  100. People look at the properties(mostly)in the view of asset not as tool for income.

    Indian economy is improving, salaries are incresing at mush faster rate than earlier, people have surplus amount which they want to invest and real estate is best option as the land value never depreciates ( normally).

    Comment by Sachin — February 20, 2007 @ 11:20 am

  101. Thanks a lot everybody for your inputs.
    While some mentioned about the interest rate hikes will arrest the Real Estate Boom, I think it has negiligible impact for following main reason.
    Almost all the Govt/PVt Corp Banks are giving real estate loans for Plots/Flats/Homes(old/extns) based on Govt Appraised value. Despite recent increase in the Appraised value, A home is valued at 5 Lakhs Govt Value but has a 20 Lakhs Market Value. And the Bank gives 85%-90% of 5 Lakhs and hence another 16 Lakhs should come from personal money.

    So I think there are 4 main factors working for the boom.

    1. Lots of black Money/ Un accounted Money from individual rich people in towns/villages betting on citi real estate

    2. Lot of FDI Corporate Investments to buy Enclaves or to build commercial properties

    3. Lot of NRIs are driving their sleepy money (Bank CDs, Matured Mutual Funds balooned by recent world economic growth and even Credit Card loans taken on 0% APR and keep circulating it)

    4. Another candidate is Conventional Average Indian who saved all his/her savings in Bank/LIC/Gold/Places in their village for child’s future education/marriage/buying permanent home in future. This person typically diverting more than 50% of their sleepy savings mentioned above into this boom and coupling that with Bank Loan to smoothen the investment.

    And almost 30-40% from above categories are doing some kind of flipping. Buy 2 Apartments cheap, sell 1 after 2 years and buy 2 more at a cheaper place and wait for it to grow do the same.

    Buy 1 Acre land for 10 Lakhs do it in plots sell half for profit and do the same at 2 kms down the lane.
    I came to this conclusion after talking to more than 10- 15 people who are realtors, individuals in India and friends in USA who have lean paychecks here and 30 times more fat assets in India doing some or all of the above.
    I made a mistake by doing a wild gooose chase of buying cheaper home in USA in a highly appreciated market for last 2-3 years. Kuttha ghar kaa naa ghaat kaa (KGNG). I didn’t dare buy anything here ( which is good thing because in my area (NJ), 3 BR Townhome dipped from 430K to 355K in an year) and completely missed indian Real Boon ( a damn bad thing as I grew up and know our own counry very well) Hope don’t do this mistake anymore!!!
    I call people like me as KGNG Group. Anybody else here belong to this?
    And what are you going to do?

    Any ideas???

    My Motto: Difference between knowledge and ignorance is sometimes as small as a small match stick converting vast darkness into bright light.
    Lets catch that investment matchstick now!!!
    Thanks guys

    Comment by Mad4Cash — February 20, 2007 @ 10:04 pm

  102. Mad4cash,

    You missed the train man , I missed it too , I bought property in India at a very overheated price , but I ahd to do it as I needed it , but the reality is gonna go down from here, and thats the only way I see it going the reason being the saturation in terms of the prices, th einterest rate and obviously the psychological reason of teh everything going up expected to come down.

    Just wait and watch , I am saying this even though I have just recenntly made a investment in India.Lets see how much I am gonna loose.

    Comment by Judge — February 21, 2007 @ 7:17 am

  103. Dear People

    One of the big culprits, this thread misses are the “Un-Ethical Banks” (we will call them UEB)!!

    Only the Nationalized banks (SBI, Corp Bank,..)
    1) Pay as per the Guideline value of Govt and
    2) Reject the loans, if Proper Building plan approvals are not there

    All other “Un-Ethical Banks” (particularly HDFC, ICICI, UTI and many more) don’t care for these! They cover 85% of the actual market value. For my own property, the bank rep came for registration with four cheques (one for the value of registration “white” amount for the property money, second for the stamp duty, third for the Regn fees and the fourth the remaining “black” money; so they are party to the whole thing).

    They don’t care whether the builder has proper approved plans/deviations! Builder who gets plan approval for four flats constructs 12 or more flats and these banks happily sanction loan!! All the UEBs do is, whether the borrower will be able to repay! They don’t care, what sort of a drench you are drowning in!

    In fact, the UEBs guide the small time/beginners (you know what will be their Interests), the many avenues/ways! An example:
    1) A beginner wanted to buy a huge land (100 acres, he can’t even dream of paying for such a vast land) and approached his UEB – “Bank Manager Friend” (we will call him BMF).
    2) The BMF advised him to take a Huge Insurance policy from his bank to raise his personal worthiness upto 1.5 crores, and made him pay Rs 5.0/= lakhs for the policy (BMF’s first target is met)
    3) Then, he guaranteed to sanction a huge loan (covering about 80% of the 100 acres land) (another target met)
    4) BMF also gave idea and assured that, once the land has been bought; to sell the plots (formed from the 100 acres), the builder will have a pre-approvals / tie-up with the bank, to expedite the loan approvals for the buyer (the victim) (The BMF will sell too many plots and will be meeting/exceeding his target forever)

    Many people for their first property are ignorant of all this, and become victims! End up paying for the un-worthy property for their life time.


    Comment by Truth-speaker — February 21, 2007 @ 2:32 pm

  104. Truth-Speaker,
    Good insight. Thank you. A side topic for this discussion: I am
    honestly trying to buy couple of existing homes and approached these
    private banks(ICICI, CitiNRI etc) and was told that they will give the
    loan for only at Govt Asset Value not Market Value.
    What do I need to do to get me at Market value?

    But what you say is happening, then Indian Financial Industry yet doesnt has good Mortgage Lending standards or they relaxed like in USA. I already see that scary thing in the form of variable interest rates to calculate monthly EMI. An honest Home Buyer will never really \”Own\” the Home using this escalating variable interest. And lack of good financial guidelines will create hell lot of risky unsecured loans and a big Peril to Indian Banking Industry. Long Term, High Volume, Secured Home Loans are backbone of Banking in 21st Century. By relaxing standards, they are getting ready for their own spinal cord surgery!!!
    When many people defaults to pay the home loans, these houses/properties go for huge foreclosures causing a Big dent to the Revenue of thesegreedy banks.
    I think with short term outlook, these Banks are missing real picture
    completely and betting like in Casino.

    As a conclusion, after all things considered, I will still invest in
    Real Estate but go by the \”cautious Cost Averaging Way\”. I buy a mix of more number of properties with low
    cost/future demand, less properties with high cost/high current/future demand land/places to even out their optimal value. And if real foreclosure/ down market happens, I will have more buying potential.

    Comment by Mad4cash — February 22, 2007 @ 4:35 am

  105. I cannot belive this, but the market seems to be a real risk now.

    An article from today’s Times Of India :

    ‘Commercial realty prices set to fall’

    Sujit John | TNN

    Bangalore: Many of those gleaming glass and concrete structures coming up all around you may remain just that—glass and concrete structures. Without occupants. At least for a long time.
    A survey being done by global property consultancy DTZ Debenham Tie Leung—a preview of which was provided to TOI—finds that across
    major cities in India, massive overcapacity is building up in commercial real estate. And the conclusion drawn is this: The capital and rental values of commercial property will start going down in six to 12 months. In Bangalore, over 16 million sq ft of grade A commercial space is expected to be available for leasing in 2007, but the total demand is not expected to be much more than the 11.5 million sq ft the city saw in 2006.
    In Chennai, the difference between the estimated demand and supply is literally a chasm—the supply is expected to be about 18 million sq ft, and the demand probably not even half of that, considering it was just a little over 5 million sq ft in 2006.
    In the National Capital Region, supply this year is estimated at over 15 million sq ft, against the 8.5 million sq ft of absorption it saw last year. The demand in 2006 constituted a sharp jump over the 2.36 million square feet in 2005, but this year, demand is not expected to rise more than 30%, leaving a yawning gap between demand and supply.
    “In fact, we think demand will see a maximum increase of 30% in most locations, and could be much less in markets like Bangalore,’’ DTZ India managing director Ankur Srivastava said. Locations like Pune, Hyderabad and Kolkata too are set to see significant oversupply, and hence price corrections, he said.
    “The central business districts in most locations are still undersupplied, but we believe Indian markets generally are reaching the peak of the realty cycle. Factors like rising interest rates and the government constraining channels of property funding like through NRE (non-resident external) accounts will only hasten the trend,’’ Srivastava added.
    Experts like Prakash Gurbaxani, who recently quit as CEO of TSI Ventures and has now set up a venture funded realty company called QVC Realty, agree there’s excess capacity emerging. But he qualifies that saying the excess capacity is primarily in spaces designed for IT/BPO.
    “There are other areas like retail, hospitality, and spaces that cater to the domestic market like telecom and legal services, where there is still a supply constraint. You can also find niches where demand can be created,’’ he said. “Generally, whoever gives the best value and best experience will gain. The days of being able to sell whatever you build appears over.’’

    Comment by Mit — February 22, 2007 @ 7:27 pm

  106. Interesting read.
    There are two aspects that come out. One is the rigorous financial analysis that states that there is no semblance between the rental and the property investment and hence unless there is appreciation in the property prices ( which is getting stagnant), it is not a sound investment.

    The other side is the demand supply equation which states that with the bouncing middle class, growing population and strong upward mobility of people wrt income and towards cities, prices are only going to go northwards. With land become scarce, this is expected, people will have to pay a higher price to live in a city and those investing would hope that some day eventually, rentals will catch up to justify the cost.
    However, in the current scenario of low rentals and stagnant appreciation, property will- for the some time remain a poor investment, but as long as you want to own a house in a city, you will have to pay thro you nose. And this situation is expected to continue for a reasonable time as rental- capital equation might take decades to correct. These changes cant happen overnight.

    Hence for the current working/earning generation who are still waiting to own a property in cities, the timing is bad and will continue to be so for some time ( this could be decades). And people like me will be under pressure to make decisions in this period. Hence even if its a bad investment, I will have to buy a house at a prices that makes no sound financial justification (else my wife will run away ;O)

    Comment by Pranat Pathak — February 22, 2007 @ 9:33 pm

  107. Hello Mit

    I checked (twice) both 21st and 22nd Feb 2007, Times Of India Bangalore edition, and couldn’t find the report (‘Commercial realty prices set to fall’)you have mentioned! Am I missing it? Can you please give more details?


    Comment by Truth-speaker — February 23, 2007 @ 9:42 am

  108. Truth-speaker,

    It was in Times for Hyderabad. You can read it online through epaper for Hyderabad. You’ll need indiatimes id and password. Select city as Hyderabad. Date as 22 Feb 2007. Click on Times Business. There you’ll see the above section. Click on that section to zoom in the news.

    Let me know if it helps.

    Comment by Mit — February 23, 2007 @ 11:19 am

  109. I couldn’t find it by the method you suggested; but found at:


    Comment by Truth-speaker — February 23, 2007 @ 1:52 pm

  110. Hi,
    I did not have enough time going over all parts in detail and understanding minor nuances of the matter. I would want to throw light on matters which I think may not have been covered earlier in the article.
    I find the article not trying to understand , that India has always had a different aprroach to its problems and no followed any particular model or adopted a countries method for development as India is very different , firstly it has skipped stages to move forward and the masses are a huge problem for implementation. Secondly growth in cities has ben observed at a scale of 5 times higher than in villages. As cities are few in # as villages. Compared to America , India does not have as many airports and so how would a MNC set up shop where it has no air connectivity.
    The reason for real estate prices in cities are still expected to go up on rising value of the place as these cities are few in # !! compared that of Europe where they have a very well developed suburban area which India does not.
    The most deicding factor and which I would say is trump card for India’s development is change in people’s attitude over saving and spending. It was long back when saving was the only thing on the cards for people to worry about the future. They now believe that education , technology is their future. If you see an engineer (who came from a village)who works in a software company goes for on on-site job sees the world and expects the same back home. This demand for quality by everyone has been the single most important change which has led to growth in Quality cars from Honda or Toyota…. or may be even municipal corporations planning for a Wifi city. All this is change which India is not able to digest in a single instance, its going to take some time till these modern things settle down with large acceptability. THis process which has just started will take a few years to end when you would see a stable growing economy with peace and social security. But with claims of 25% Below poverty line … its gonna be very long time till this settles down and so the economy growth is going to be here for long. Typically in fields of housing and infrastructure.
    If you would see , villages in America are spread out whereas those in India are not , so this is where India saves on transportation, communication, security and infrastructure costs in these villages.
    Lastly India’s progress is towards being a super power! WHen compared to other nations it has drawbacks like Corruption, Population, In coherent approach of states , security threat, and social inequality.
    My revies sound very pro India , but when you experience the change at grass root levels the winds of change are moving very fast(Its like a storm out there).

    Comment by Puneet — February 24, 2007 @ 10:14 am

  111. It depends where one looks, but a local bubble is definitely a fact. Whether we’ll see a burst in the foreseeable future is a different question and I don’t think we will, considering that the bubble is of a modest size. These bubbles are typical of emerging markets where locals become overenthusiastic about their realistic growth prospective –which may be excellent- and inflate prices to an extent that reasonability is light-years away

    Comment by Iraniananalyst — February 24, 2007 @ 5:35 pm

  112. Nice insight Puneet. You are right about Education, Spending vs Saving, Quality hunger community, heavy urbanization vs poor rural development are all the factors ( or I can say the ugly faces) of Capitalizam applied to a Developing Country. Instead of ample employment growth ( 95 employed 5 unemployed), every citizen having minimum quality life(An hour work in US fetches the worked a day meals vs A day work in India doesn’t fetch full meals to 4 people of family), we now in India see very skewed development. Only a sect of (

    Comment by Mad4cash — February 25, 2007 @ 5:45 am

  113. –Sorry my prev message got truncated.
    Ony a sect of people are doing wonders in fields like IT/Finance etc.
    So this kind of biased development will take several years and make the rest of India frustated!

    Comment by Mad4Cash — February 26, 2007 @ 7:54 pm

  114. Rise in property prices is related to several factors. Firstly there should be a demand which is already there. When the real estate boom started it was primarily because of the software boom ( i speak for bangalore ). Many new jobs with sizeable pay packets along with availability of cheap credit (low interest home loans) created huge liquidity access for a lot of people especially the younger generation, this created a whole new lot of home consumers who so far either lived in rental homes or very small homes, these people started buying homes for their end use to fulfill an emotional and security need. So the Builders and developers catered to this market first.
    Then came human greed where hype caught up and people started buying / making agreements to sell to other people with the same motive, so while the real end users where growing at a modest rate the greedy speculators grew overnight and now prices are at such an high the real users cannot afford to do so and speculators cannot afford to speculate at such high levels, so those who have enterd at such high levels will be struck with the rotten pie.
    However the bright side is the tier II cities will witness action as IT based companies will seek new areas to grow ,to source affordable HR and affordable real estate.
    Therefore i dont see a bubbleburst as in 96′ when markets were not mature but a correction in overvalued and over inflated prices along with realistic return on investments.
    However its better not to take positions right now in the metros ,rather concentrate on tie II cities.
    Lets not forget the inflation is being caused due to supply shortfall. Also Indian economy is poised to grow only upwards. I feel interest rates will stabilize once inflation is bought under control.
    One more big worry to add, Agricultural Growth is negative and a bad monsoon will only add to the worrying trends of inflation as supplies will be further hampered, along with a more poorer plight of small farmers and their families who constituite 63% of our population. So big retail plans will need to restrategise.


    Comment by Rajesh — February 27, 2007 @ 2:52 pm

  115. Home Loand slows down

    Comment by Mit — February 28, 2007 @ 2:28 pm

  116. Here comes the bubble burst!!Nice piece of info Mit!!

    Comment by Judge — March 2, 2007 @ 10:07 am

  117. One More:

    Comment by Mit — March 2, 2007 @ 1:23 pm

  118. Forget all the numbers, here are some basics about any “Market”.
    There has been no market in the human history that grew in a straight line. every market is made of up and down cycles and every cycle has a few phases. does not mean every cycle has equal duration or magnitude. Here’s a typical UP cycle:

    Phase1: Higher real demand or supply shortage drives the market higher(in real estate it’s mostly higher damand unless it’s New Orleans after Katrina)

    phase 2: Market experts recognize the trend, get in and drive the prices even higher, this is the longest phase but growth rate is moderate

    phase 3: Market growth is discussed in the general media and around every corner and the comman man “finds” this great place to make some profit. Comman man just looks at the past performance and expects the same in the future without considering demand/supply and the need/affordability equations. Comman man always drives the prices higher much faster than the underlying fundamentals will justify(think of Nasdaq in 1999 or Shanghai exchange in 2006). This phase is the shortest in duration but growth rate is rather crazy. at the end of this phase the REAL market experts recongnize this craziness and start to pull out, so the prices stabilize.
    Phase 4: Our Comman man tired of waiting for higher prices or due to financial stress decides to pull out which in turn feeds the down cycle (pullback, correction, bubble burst,crash are the other synonyms). Thus the phase ends every badly for the late to the party comman man.

    Now, the question is: are we in the phase 3 or not. Just talk to the people that you think are not market experts and find out. My wife has been pushing me to buy a flat ANYWHERE in india(we live in US) and i know for sure she is not an expert in real estate market.

    Comment by Gunvant — March 3, 2007 @ 3:46 am

  119. Adding salt to it:

    Comment by Mit — March 8, 2007 @ 3:41 pm

  120. HDFC hikes home loan rates to 13.5%

    Comment by Mit — March 8, 2007 @ 8:20 pm

  121. Having gone through all the comments on the real estate bubble of India and done my own research as an NRI of 11 years this is what I have decided about purchasing a flat in India after my return to India next year. I will rent an apartment worth 50 lakhs for maximum Rs. 8000. I will wait until the real estate bubble bursts to buy a flat. Until then it will be wise to live in a rented apartment. The stay in a rented apartment may be 2 years or more, do not care for that. I will make money by putting my earnings in FD or other such safe instruments which will appreciate 8%. THE BOTTOM LINE IS I AM NOT GOING TO PURCHASE A FLAT UNTIL THE BUBBLE BURSTS. AND THE BUBBLE MUST BURST AS THE CYCLE OF GROWTH AND RECESSION IS HARMONIC – UP AND DOWN. THE INDIAN BULL MARKET HAS BEEN RUNNING QUITE LONG. JUST WAITING FOR THE BEAR MARKET TO GET IN.

    Comment by Bear Market Waiter — March 9, 2007 @ 10:45 pm

  122. Looks the prices are not going down in near future , I purchased a peice of property couple of months back and it has already “appreciated” by 25-30% ,cant believe this crazy speculation going on there.

    Comment by Judge — March 18, 2007 @ 11:45 pm

  123. right now lets say that a two bedroom flat in bangalore in a decent locality is available for around Rs.25-30 lacs. which is affordable to a family earning around Rs.5 Lacs/year.

    if we were to beleive those people who think that this growth is here to stay and property prices are going to appreciate by atleast 30% every year… forward to 5 years….and the same flat is now around Rs. 60 Lacs. which can be bought only by a family earning around Rs. 12 Lacs. I dont think there is any room for salary growth at this pace.

    and if people think that things wont stop there too… forward 15 years……a two bedroom flat sells for atleast 1.5 crore…..affordable only to family making around 36 lacs.

    maybe some one out there still thinks that there is always room for growth??

    my opinion….I do not know if it is going to crash or not…..but i am sure it cannot continue to grow like this……there is limit to how much speculation can go….

    Comment by raqm ahuja — March 19, 2007 @ 3:57 am

  124. I agree to “raqm ahuja”. I’ve seen prices rising from 2000 per sft to 3500 per sft for the same property in around 3 months which is not the same in current market scenario. I don’t expect prices to go back to 2000 per sft but I do expect some downwards slope in prices towards viable stability.

    Comment by Real Estate Watch — March 22, 2007 @ 6:00 pm

  125. I am an NRI living in Bangalore for the 2+ years. The whole discussion whether the Indian RE is in a bubble or not is very interesting. Here are my 2 cents worth observations/opinions.

    1. The media (newspaper, TV) does not discuss the potential for bubble. News papers for example get a ton of full/half page advertisements from developers. The news is always positive. I think this skews people’s psyche at least on weekly basis that the boom continues.
    2. Builders when they start a new project always price it higher than the neighborhood prices and this has the artificial effect of jacking up the RE prices in the area. I live ear JP Nagar 7th phase. The Brigade builders announced a new apt project and prices starting at Rs 4000 per sq ft. Sobha Tulip apt (nearly complete) which couple of months ago went for Rs 3k-3.5K per sq ft increased to 4400/sq ft!
    3. There are lots of investor-owned empty apartments. True these were probably purchased at half the price. Not many are trying to sell because every month price is appreciating and any new development pushes the completed apartment project price even more. What if price begins to go down? Will they hold it? Or flip it? What will happen to supply?
    4. Rentals: I initially rented in a mantri apt 3 BHK for Rs 24K. When the landlord started getting greedy, I shifted to a bigger 4 BHK for the same rent. My current landlord took 14 months to rent a 3 BHK (2000+ sq ft) next to mine for 18K! He used to beg us to find a good renter for him! So overall, my calculation is residential rental in good projects are available for Rs 8-10/sq ft and that has not changed for the past 3 years. The rent will be lot less for houses because they do not provide good amenities (gym, pool etc)
    5. Rentals yields are hovering below 2% currently provided if you can find a renter! At 20-25K, most Indians balk at renting and it is usually the NRIs/MNC executives who are willing to pay that price. Most of these renters sooner/later will move into their own apartments or stay in a rental and try renting their own. My prediction: RENTAL YIELD WILL STAY THE SAME OR COULD GO EVEN LOWER FROM HERE!
    6. People don’t want to analyze. They believe what happens around them, which is RE price escalation. If one brings real estate valuation metrics such as Price/rent, rental yield, etc. for discussion that person will be seen as Looney disconnected from reality or (realty?)
    7. Corollary to point #6: If people begin to analyze bubbles/excesses will not occur.
    8. Then there is this intelligent question, which is supposed to corner an analytical investor. “Prices have appreciated 5-10 fold in the past five years. So if there is correction will the prices go to 2003-2004 price levels?” If you can’t say “yes” affirmatively then all your theory is incorrect!
    9. My opinion: There are only a very small % of locals and NRIs who have not bought into the boom. Metrics apart, this is a good contrarian indicator. Very reluctantly I have booked a 3-BHK apartment and a small villa a year ago with very limited leverage. This is just our insurance for betting against the masses.


    Comment by nathan — March 24, 2007 @ 5:28 pm

  126. I have been waiting to buy a house for the last two years. The rate at which the prices are skyrocketing, I cannot afford a decent house, like the one I live in on rent. The owner wants a higher rent and I did a survey of the marker and found that the rental prices in Delhi have gone up by 20 per cent in the last two years. How do you explain that. If there are so many houses available, and people have been buying them, how come the rentals are also shooting. Everyday a new project is announced in the NCR region – out there in the woods, literally for only the IT professionals and the NRIs can live there. There is no decent transport system and even if you have your own transport and can afford to travel 25 to 30 km each way you spend your life on the roads.
    So you look at Delhi proper and what do you see. Pigeon holes and dark burrows with no conept of ventilation for the builder has used every inch of space going for Rs 45,00,000. So you find a 100 sq yard apartment in a middle class locality quoting that price. So what do I do? I prefe to pay the landlady a Rs 2000 rupee hike in rent for the spacious house that I am staying in rather than invest in a poky house. And mind you, which no one seems to be talking about. Delhi is sitting on a fault and very vulnerable to earthquakes. The government recently okay a plan that lets people add additional floors and this is being done at great speed. But there is just no talk of making the structures earthquake proof.
    I am not sure if I will be able to live in the city after my retirement if the prices go on at this rate and I am unable to afford the rent. I will probably have to head for some small town.

    Comment by sv — March 26, 2007 @ 6:49 pm

  127. During my last trip to India, I was also looking to buy a house, with a plan to return and settle down, I was surprised at the prices in the mid sized town that I was looking at. It is more expensive than the Bay area!!!. When I tried to find out what is going on, one of my friend was telling me that 8 out of 10 registrations are “powers” it seems, since I had no idea what he meant by “powers” he explained me that it is short for power of attorney, instead of selling the property outright they sign power of attorney so that they can save on the registration fees it seems, now who in the right mind (if your true intent is to occupy) would not want to register it as a sale/purchase? This clearly tells me that most of the transactions are done by scumbags (aka flippers). Also I believe all the IT and black money reasons are flawed. Did anyone analyze how many IT people are there in india? what percent of them are buying? Even if IT sector employs 10% (which I highly doubt – I would guess about 1% or less) of the working population, there shouldnt be more than 30 million transactions right (again assuming there is about 300 million working class in india)? By now I am guessing all the IT people should be owning their house/flats etc(which again is not true because most of the IT people that I talk to, couldnt afford one). I dont believe the black money logic either, black money was there all the time, is there and will be there(nothing changed in the past couple years) I dont think anyone who is smart enough, and who has black money, would get into real estate, because I am sure the Income Tax agents are having a close watch on all these real estate transactions.

    It is just a matter of time before these scumbags, who contribute nothing to the society but try to profit from everything, become the bagholders(just as it happened in US), then everything will become normal. I dont mind waiting for a couple more years because my target to return back is 3 to 5 years from now.

    Comment by BGS — March 27, 2007 @ 1:31 am

  128. I hear all these theories which developed for developed countries which do not factors indian political, economic and behavioral environment
    1) we did not see this kind of growth in 1990′s b/c of money that was flowing into indian markets from NRI’s and that tripled after 2000
    which is now 22B Dollars
    2)indian’s are more conservative in investments and not tend to take risks in investments
    3)this is completely corrupted market where black money and blah blah blah..investors can cover up and don’t pay taxes on this returns and blah…
    4)india is densely populated and we are seeing expulsive growth of the economy
    the same thing happened with chinese real estate market and affordability of the housing by common man was unreachable so, chinese govt. had to come down and had to make legislation to make the market stable which not allowing foreigners invest in real estate market and don’t forget chinese non-resident remittances are just 5b dollars saying this we cannot control our markets b/c of political environment and no-leadership from out govt
    of-course markets will adjust and collapse at some point when indian economy is no-more favourite destination for cost effective productivity and the rupee value appreciate against other currencies and this will be dangerous situation

    Comment by Ravi Sangam — March 30, 2007 @ 1:17 am

  129. I guess this will be an interesting read for those who believe that there is no bubble.

    “Earlier a person would buy a house at the time of the launch – with discounts offered which would vary from developer to developer – and sell in just a few months. By the time the construction was completed, a house or apartment had been resold five to 10 times.”

    Doesnt it sound like what was going on in Miami and Las Vegas a couple of years back?

    Comment by BGS — March 31, 2007 @ 5:46 am

  130. RBI is raising the home loan rates again. This is definitely going to help accelerate the price decrease in the already deflated real estate area. Read the main news below from Times of India. And guys 2007 is definitely not a good year for Delhi from astrological point of view also. Read this article “THE DREADFUL YEAR 2007? in

    by one of the most famous Yogi-type astrologers of India Mr. K. N. Rao, retired Director General of Indian Audit and Accounts Service. This article will give you an idea why you want to postpone your flat purchase in Delhi. Remember this article was published long ago when Mr. Raoji did not have any idea how real estate would become a bubble in India.

    NEW DELHI: Interest rates on loans are set to shoot up further with the Reserve Bank of India on Friday deciding to make money costlier by hiking the inter-bank short-term lending rate by 0.25% and the mandatory deposits banks are required to make with the RBI by 0.5%.

    These measures are likely to hit economic growth. But, in a significant policy-turnaround statement, RBI said growth had now become a secondary concern. Controlling inflation is the central bank’s top priority.

    This would leave banks with no choice but to increase home loan rates by half a percentage point to 11.50%. The measure, besides affecting prospective loan seekers, will also hit those already paying home loan EMIs at floating rates. Interest rates on personal and commercial loans are also set to increase by the same amount.

    In the last two years or so, banks have increased home loan rates from 6.5% to 11%, resulting in equated monthly instalments rising by 43%.

    Surprisingly, RBI announced these measures around four weeks ahead of its annual credit policy. It increased the statutory requirement for banks to keep deposits with RBI (credit reserve ratio) by half a percentage point to 6.50%. This squeezes money out of the banking system by forcing banks to deposit an extra Rs 15,500 crore with RBI.

    Besides this, the central bank has also increased the overnight inter-bank lending rate (repo) against government bonds by a quarter of a percentage point to 7.75% — raising the benchmark interest rate.

    With these measures, RBI intends to bring down the inflation rate to below 5.50% from the current 6.46%.

    A senior official of a public sector bank said this would lead to an increase in the cost of funds, leaving the banks no option but to pass it on to customers.

    ToI article.

    Comment by BMW — April 3, 2007 @ 2:30 am

  131. So what are you saying guys? All growth in Real Estate will go down to the dogs now?!?!
    Should we buy or wait?
    Are you implying whatever is happening in US will happen in India? To me it looks like the equations are quite different. In US 95 people work while 5 are unemployed. India it’s not the same. I don’t know what to draw out of the economics in India.
    Puzzled really!!!

    Comment by Mad4cash — April 3, 2007 @ 8:43 am

  132. My Post has been also been removed. I’m not sure why it was deleted and that too I wasn’t informed. It contained very good links of recent real estate market trends. I request the owner to put comments if any posts are removed.


    Comment by Mit — April 3, 2007 @ 11:47 am

  133. It’s certainly not time to buy. Rather I would say it’s time to sell if possible (all personal views). Seeing the inflation and RBIs ways to tackle it, definitely the liquidity situation would get tightened putting all the transactions to be delayed ( I won’t buy a house with home loan interest rate of 11.5 % and would wait it to come down. ). This would force prospetive sellers (builders specifically) to quote less but it would definitely going to take some time before it starts as money is still flowing in and economy is still growing.

    Comment by Mit — April 3, 2007 @ 11:57 am

  134. This was a very interesting read! Finally boiling down unfortunately to wait and see. I did that 2 years back and am kicking myself for it. Hopefully in another 2 years I’ll pat myself on the back for waiting.

    Comment by Nam — April 3, 2007 @ 5:01 pm

  135. CitiNRI increased their rates to 14% fixed and 12% floating. Almost all other banks are of same path.If that’s the case,God knows who will buy these properties at higher prices!!!

    Comment by Mad4Cash — April 4, 2007 @ 12:20 am

  136. I have been following the real estate of NOIDA for the last one year. Four months back a 3-bedroom builder floor flat at sector-62 of NOIDA was quoted at 60 lakhs. Were they nuts to quote this sky-high price !!!??? That flat is now being quoted at 45 lakhs. Wait for awhile to see the price drop to 30 or 25 lakhs as the home loan rate increase gives effect in the coming months.

    Comment by BMW — April 4, 2007 @ 3:08 am

  137. I hear about orices dropping in Bangalore and NCR region (Delhi-Noida-Gurgaon) region. Does anyone have actual data around price declines in other cities like Chennai, Hyde etc. Like some of the others, I have been waiting on the sidelines fpor last 2 yrs while prices have kept going up.

    In Chennai, I can report that rentals have more than doubled in 3 yrs and from an affordability perspective are beyond most single income households. I work in teh tech sector and can report that compensations have increased by less than 40% in these 3 yrs- for a real growth abt 6% with abt 6-7% inflation.

    Comment by Raghu — April 4, 2007 @ 12:28 pm

  138. I moved to Bangalore from Hyderabad a year ago. A year ago, RE in Hyderabad was cheaper compared to Bangalore. I observe that RE prices in Bangalore remained more or less remained flat, but RE prices appreciated more than 100 %. It is hard to get an apartment near Hi-Tech city less than Rs 3000 per sq ft. Last month, I visited Dallas, where a really big house ( > 4000 sq ft) was going at $200 K (~1 Crore). Come back to Hyderabad, 3000 sq ft villas are being quoted at 2 to 3 Cr. I do not understand this! Compare infrastructure, jobs, facilities – anything simply do not match up to US. Real estate prices in Hyderabad are absurd and have to fall! May be it will take some time till developers run out of time to find new buyers!

    Comment by Nagesh — April 4, 2007 @ 7:15 pm

  139. The problem is few people are making money by creating a hype. Keep the same money in the bank now that interest rates have gone up. You can rent any place you want and still you’ll be left with lot of interest money + your principle. India real estate is crazy and it is bound to come down. Sales are down 25% in Mumbai (thats what builders are saying which might far from truth).

    Comment by Sandeep — April 5, 2007 @ 1:44 am

  140. Thank you BGS. It was interesting going through the astrological predictions about earthquakes!
    By all accoounts Delhi needs to be worried. Recently one of the leading papers– Hindustan Times of Times of India, I forget which, had carried a good article about how buildings should be rated for earthquake safety. A flat in a building that is higher on the scale for earthquake safety would cost more than the one that isn’t. However, we never bother looking into all this. During the last earthquake tremors that hit Delhi, one of the highrise buildings that I happened to visit, had a major crack along its outer wall.The residents were naturally very worried and were running around getting structural engineers and soil experts to assess the damage and what could be done.
    A flat on its eighth floor lay vacant for a couple of years. The owner had moved out in fear, but could not find any takers for it. But public memory has a very short span. The crack was filled and no one mentions it now. The flat went last year I am told for a whopping amount to some NRI.
    It is strange that instead of selling structures that are well-ventiated and struturally sound, builders selling points are – teak wood finish, Plaster of Paris decorations (that resemble cake icing decorations in ALL the rooms), chandeliers (that had been designed by someone severely aesthetically challeneged) and imported tiles, the prices of which you are informed is Rs 300 a piece! (I tried to mentally work out how much it would cost me if I were to rip it apart and put some appealing stuff)
    So friends the choices for a middle class person in Delhi are -
    1. Poky badly ventilated house in the city…where you are on bad terms with your neighbours, for you have running battles over parking space (please read the latest of how a man was shot at by his neighbour during a spat over car parking space. This was in the very posh locality of Panchsheel Park – a house here goes for over 2.5 crore.) But this is a way of life in Delhi’s good localities like Greater Kailash, Safdarjung, Green Park, South Extension…
    And now more floors can be added to these structures. How safe will these be and where will the cars be parked?
    2.In a high-rise from a builder who sells the greenery around in the ad…for there is little else to sell…uncertain power, terrible roads, no drinking water…(earthquake safety? What is that?)
    We are Indians. We believe in the Almighty…We believe He will protect us ….

    Comment by SV — April 5, 2007 @ 9:49 am

  141. —Answering to Nagesh Posting on April4th—
    I am tracking Hyderabad RE to buy a Residential Property. In the past 3-4 months I don’t see any Rate compromises or reductions. Like you said, either we need to wait couple of more years or buy high the primary living property and buy another low price property when the price goes down ( to hedge your initial investment).
    Can any other Hyderabad RE trackers help us?

    Comment by Mad4Cash — April 5, 2007 @ 8:18 pm

  142. First let me thank you all for posting wonderful thoughts on real-estate market.

    Even I am also a potential buyer like you, following the market in southern India especially in Blore. I am just summarizing the parameters for the raise and fall of the apartment real estate sector. I feel land real estate works in different dynamics.

    The parameters for raise are:
    These prices rise is mainly buyers driven. So 95% issues are related to buyers and 5% with sellers.
    1. Affordability ( EMIs )
    2. Availability of the money ( initial down payment and/or loans)
    3. Demand (passion of living in own house)

    The order of parameters which I mention is very important. Even the demand is more but affordability is less then price appreciation will be less and visversa

    Now there are 2 questions
    1. How long this will continue?
    2. How much will rise?

    As long as the rise parameters are satisfied, only answer for both a question is Endless. The prices just keep on goes up ofcource it is happening from 2001 till few months back.

    Now let’s see the parameters for fall:
    In this category sellers (builders/ individuals (2nd sale)) and buyers will equally involve.
    1. Fear of further Appreciation (Buyer / builders/ individuals)
    2. Holding capacity of property (builders)
    3. Affordability of EMIs (buyer / individuals (2nd sale))
    4. Current price of the property (buyer)
    5. Better returns from other markers ( stock, more interest in banks like that)
    6. if (interest paid in a year – rent saved/earned in a year) and property appreciations figures are not encouraging
    7. Availability of units in the market and so on …

    Out of all I feel the point 3 is very important sign to fall of prices.
    If the current owner is not able to repay the emi due to the rise of interest rates then market will collapse. Seller still makes profit from this property becos it could have doubled in this 1 or 2 yrs time. But it is not at all a good sign for builders becos running apartments are available less than his new ventures. But builders will resists for few more months (5/6) to sells for less. I hope this is the good time for individual sellers to make profit get out of high EMI trouble.

    Now the questions is How much will fall?

    Let me give a small answer by considering the factors like land cost, contraction cost (brick, sand, iron, cement, labor ), interior costs, amenities and so on and so on …50 % less than the current market price will not push the builders to loss. That means you can negotiate on an apartment with 50% less than current price and finalize it at 55% of current price. Or you can wait for 5 -6 months to price come down by 35 to 40%.

    Mean time we need to hold ourselves by keeping money in banks which are giving 10% interest.

    Thank you,

    Comment by Durga — April 6, 2007 @ 1:26 am

  143. I have been following RE prices in Tambaram area of Chennai. I wish to add the following. The going price for a ground(2400 sqft) in the Tambaram, Selaiyur area is around 30 lakhs. Assuming a FSI of 1.6, a builder can build apartment upto 7680 sqft. A look at ACC portal which gives you a ball park figure of construction cost in Chennai, at around Rs 800/sqft. Let us assume it as Rs 1000/sqft for our caluclation, the total construction cost is 7680000 ( Rs 7.68 million) add the land cost of Rs 6 million to the construction cost, the total cost is Rs 13.68 million. Add to this a profit margin of 20%, the total cost of 7680 Sqft is Rs 16.416 million. This roughly works out to Rs 2140/sqft. This is the cost including the cost of land. However, the builders price in this area is around Rs 3500 to 4000. Can the demand justify a profit margin of 70 to 100 %? It is high time for a regulatory body to monitor the price/services in real estate industry.

    Comment by Bharath — April 6, 2007 @ 5:19 pm

  144. Guys,
    I heard through RE brokers in Hyderabad that there is some sluggish sales and some reduction of 5-10% for Flats/Home prices. They are saying this is the direct result of recent Interest Rate hikes (as 90% taken floating rates) and the Banks forcast of further hikes this year.
    Looks like waiting a little doesn’t hurt!

    Comment by Mad4Cash — April 9, 2007 @ 8:29 pm

  145. Would appreciate if you could share links to similar websites on discussions/articles of real estate prices especially in Hyderabad.

    Comment by Nam — April 10, 2007 @ 8:20 am

  146. Does the bubble really burst. I seriously doubt… wait for 20-30% of correction from current prices. we all jump in to make the prices 100%. this cycle will continue.

    Comment by Venki — April 10, 2007 @ 10:07 am

  147. Would you buy a house at an interest rate of 12% and also that it’s still expected to rise? You won’t cannot except if you are an NRI and have liquid cash avilable on your hands which is not the case for all Indian buyers. The current Indian buyer is heavily dependant on home loan. The correction you are saying would only occur if home loan interest remains at this rate or still continues to rise. And nobody would be able to pay 12-15% of interest rates.

    I can see that the volume of transactions would drastically decline compared to current volume leading to prices to come down and get stable. Once the liquidity situation gets better for RBI (which is gloomy to be solved in short duration), home market would again get hotter. But it remains a mistery…. WHEN?

    Comment by Mit — April 10, 2007 @ 11:36 am

  148. I am trying to sell my apartment in Gurgaon for the last 4 months.The builder was quoting around 55 lakhs.I am even ready to sell it for 48 lakhs.But unable to do it.The best offer I got so far is 45 lakhs.I have advertised the property in many portals .Buy hardly get any response.
    In Bangalore average price quoted for a decent apartment is around 60 lakhs.It looks like nobody is able to sell at that price.I can see same advts reappearing in many property portals .The other day some broker called me and said one Purva property in Kanakpura is availabe for Rs.2350 per sqft now(they were quoting 2800 /sq ft before)

    Comment by nsk — April 10, 2007 @ 12:28 pm

  149. I am getting lot of emails from builders in bangalore offering incentives for early registration along with extra fittings and free parking. Wait a little. Prices have no where to go but to come down. These builders have taken everybody for a ride.

    Comment by Sandeep — April 11, 2007 @ 7:23 am

  150. I got an offer to buy a newly constructed Duplex home for 40 Lakhs in Hyderabad, 3-4 weeks ago, they(builder/broker) changed price to go for 35 lakhs. I know some of my relatives baught and know people who sold similar homes for 25 lakhs last year. So all the 60% appreciation has been only in 12 months and this frost is melting now.
    Otherthan increase in interest rates (negative)and increased sales activity(positive) nothing changed in last year!
    As per offer goes, I am calm and waiting!!!

    Comment by Mad4Cash — April 11, 2007 @ 2:38 pm

  151. Mad4Cash, which area are you talking about in Hyderabad?

    Comment by Mit — April 12, 2007 @ 4:21 pm

  152. Mit,
    I got this for Sainikpuri Area. Couple of my friends are haunted by brokers for Alwaal area too. It looks like Brokers are making more money by creating fluke high value.

    Comment by Mad4Cash — April 12, 2007 @ 6:56 pm

  153. That’s true. 6 months back, appartments at Alwal were quoted 800 per sft compared to 1800-2000 per sft 2 months back. I was shocked to hear these prices and I’ve stopped my hunt for next 4-5 months now, though I already have a sanctioned loan. The prices are irrespective of the developments and facilities in area, and doesn’t matter whether it is located near or farther from the city and whether there are any transport facilities to reach such places. TRULY AMAZING!!!!

    Comment by Mit — April 13, 2007 @ 10:19 am

  154. I hear from my father-in-law (who stays in Hyderabad) that the brokers are chasing the buyers and offering discounts of 20 to 30 % of the previously quoted rates. There are lot of unsold plots near shamshabad, Maheshwaram mandal and its becoming difficult to get new buyers.
    However, I feel that brokers are not really affected by this. They made their money and they did not anyway invest their money…they just have Power of Attorney and they negotiate with the farmers / landowners to push the price downwards.
    My advice not buy RE now and just wait and watch for a bloodbath!

    Comment by Nagesh — April 13, 2007 @ 7:43 pm

  155. Nagesh,
    Thanks for your inputs. Though it’s comforting to know the prices are becoming realistic, “realistic” is becoming relative word in RE. I think still some more H1′s come to US and some more lands/plots/flats will be sold/resold in Hyd/elsewhere. This will be slowed down only when interest rates increase 2% more. When a guaranteed 10-12%/year return from Bank looks attractive, people will stop betting on already high prices of RE.


    Comment by Mad4Cash — April 13, 2007 @ 10:47 pm

  156. Well H1-B is over for 2007-2008. Lot of applications will be from students guraduating from US universities. However they would have to clear student loans and things like that. I was in that boat and it took me 2 years to clear off. Also I wouldn’t borrow from bank at 12%. It is way too much. I am just saving as much as I can so that when the market really comes to a halt, I can bargain and get a damn good deal. I would say good deal would be less than $2000 for apts and Villas for less than a crore. Right now, it is 50+ for apts and 2-3 crores for villas.

    Comment by Sandeep — April 14, 2007 @ 9:27 am

  157. Sandeep,
    I doubt out of 65K, 30K will be from US Univ., moreover other than 65K extra 25K is only meant for students. So some more US Visas will influence the price ( but will take time as they have to wait 6 months to qualify as NRI’s)
    In your message did you mean Apartment prices should be $20,000?

    Comment by Mad4cash — April 14, 2007 @ 7:34 pm

  158. I meant less than 2000 rupees per sqft and 50+ lakhs for an apt.

    Comment by Sandeep — April 15, 2007 @ 12:03 am

  159. Take your money and flee the housing market
    Friends, I believe it is time to take your money and exit the speculative real estate market. The average person doesn’t understand anything about finances and never will. The average person can’t even calculate a 15 percent tip at a restaurant, and he or she is buying real estate because he or she wants to double his or her money. Are you kidding me? Take your money and run; that’s my advice. Run from the inflated real estate marketplace before you become another victim. These super hot, speculative housing bubbles and stock market bubbles cannot continue. They always correct. Gravity kicks in, and, eventually, things unwind. A lot of people get hurt. They lose their money. To some of those people, I say, “That’s a really expensive education you just paid for.” A lot of life’s lessons are hard to learn, but some of them can be rather expensive.
    That’s my personal advice. I’m not trying to play your financial adviser. You can make your own decisions in these matters. This is my personal opinion based on experience and analysis of the market. I’ve been watching this thing for quite some time, and the signs are now becoming very, very clear. Actually, I’ve been watching this thing for a couple of years. I saw it get overheated. I was seeing it in my own city. When you see property prices going up 25 to 30 percent a year, for six years in a row, that’s pure speculation. House values don’t normally go up that high. There’s no justifiable reason. The population isn’t increasing 30 percent a year. There’s not that many more people bidding for the same house. There’s something else at work if prices are skyrocketing that quickly.

    So, it’s December 2005. I’m going on the record as saying this bubble is going to pop, folks, and you can call me a pessimist or a doomsayer if you want. The fact is, if you understand math, you know I’m right. If you want to protect your own finances, you’d better take a good, hard look at this and make some decisions about what you’re going to do. Do not leave yourself over-leveraged in speculative real estate. You thought you were going to retire on the beach, and it ends up you’re flipping burgers as a second job to pay off what you owe the bank, and they garnish your wages on top of that. That’s what happens to people who don’t get out in time.

    By the way, I have nothing for sale here. I don’t sell home loans, and I don’t have a book on this subject. I’m just passing this along, because I don’t want to see people hurt again. A lot of people will never hear this message, and a lot of people who do hear it will say, “This guy doesn’t know what he’s talking about. He’s not a real estate investment guru. He’s not a banker. He’s not a financial expert. What does he know?” That’s why I’m going on the record. We’ll find out.

    We will find out what happens to housing prices in the years ahead. We’ll come back and revisit this, and we’ll disassemble the popping of the bubble after it happens. It will be interesting to see if anybody gets away unscathed in this big scam. The best way for you to escape unscathed is to make sure you are not over-leveraged. Have some equity in your home. If you can pay extra to pay down your mortgage, you should do it now, and don’t go out and buy an overpriced home just for speculation.

    Don’t compromise the roof over your head. Don’t compromise your family’s residence just to try and make a quick buck in the overpriced housing market. Protect your residence and your family. If you have extra cash, put it into your own house right now. Own your house. This has been a rule I’ve lived by for many years. You should owe nothing to any bank on a house you live in. In my opinion, until you have 100 percent equity in your own home, you have no business investing money in a second home. You should first give yourself the financial foundation of owning your own home free and clear. Once you have taken care of that, you can afford to risk cash in the housing market, if you so choose.

    Until then, you’re crazy to do so, and I know a lot of bankers and financial people will strongly disagree with this line of reasoning. They’ll say, “No, no, no. Mortgage everything. You should highly leverage your first home and mortgage your way into a second or third home, and you’ll be rich when things go up.” What they’re not telling you about is the potential downside. What happens when those prices you just paid for those second or third houses are cut in half because the housing market pops? Then you lose your third home, abandon your second home, have to sell your first home, and you still owe money.

    Don’t let that happen to you. Be smart. Pay attention to what’s going on. Don’t follow the sheep. Do you know where the sheep are heading? They are headed to the slaughter, just like they did in the dot-com boom. People were led right into a financial slaughter, and they got taken, too. Their life savings were taken away virtually overnight. Don’t let it happen to you.

    Here’s one more thing: what if I’m completely wrong about the timing on this? What if it takes five years for prices to correct rather than five months? My answer is simply this: it’s better to be out sooner rather than later. It’s better to miss out on some gain (opportunity cost) than lose your life savings in a real estate crash. And if you think the housing market will always go up — forever — then you have no business investing in the first place. The laws of economics have not been rewritten. When interest rates rise, this real estate balloon party is history.

    Comment by Bhatt — April 15, 2007 @ 4:19 pm

  160. The first warning signs of the bursting housing bubble
    First, remember that things get overheated when the general public begins to spend money on investment vehicles with the idea of quickly doubling their money. When enough people get into speculation, it is a sure sign of a bubble. When people aren’t buying a house for a place to live or as a long-term investment vehicle to rent out, you know the market is overheated. When you hear a lot of people talking about “making money on their house”, then you know there’s a big bubble. So, that’s one interesting sign. It’s not very scientific, but there are far more scientific signs to be seen.
    Normally, when you buy a house as a landlord, the rent that the renter pays you covers your mortgage costs, plus a little bit more. That’s what happens in a normal, healthy economy. Let’s say you go out and buy a home valued at $200,000 and you rent it out for $1,500 a month. That $1,500 a month should cover your mortgage payment, plus a little bit more for maintenance. This is what happens in a normal market. But in a bubble economy, or a bubble housing market, there are so many people buying houses for speculative purposes that this is an oversupply of houses available for rent. Therefore, the demand from renters stays the same, but the supply of houses available for renting expands. This glut of houses for rent becomes unusually large because all these investors have bought houses and condos with the expectation of making money on the speculation. It’s not just houses, either; it could be condos or apartments as well. I’m just using “houses” in a generic sense.

    How do you know when there is a glut of houses for rent on the market? You know because rent prices begin to fall relative to the price of buying a place to live. It’s standard supply and demand economics. Prices begin to fall because there are too many houses available for rent and not enough renters. No landlord wants their house to go un-rented for five years, so they start lowering the rental price to get renters in. So, there’s an artificial suppression, a lowering of the monthly rental prices on houses available for rent. This creates a gap between how much you get in monthly rent for a house (as an owner) and how much you have to pay the bank for the mortgage. Let me give you an example…

    Let’s say you bought a $200,000 house, a second home, because you intend to double your money as property prices go up. You’re hoping to spend $200,000 today, pay the bank for a few years, and then sell that house for $400,000. This is what people are thinking. Well, unbeknownst to you, everybody else is doing the same thing, and all of a sudden, there are a whole lot of houses available for renters to rent. What does this do? It suppresses the monthly rent fee. The market is too competitive for you to get $1,500 for monthly rent. You can get only $1,200 or maybe you can only get $1,000.

    Now you’re only getting two-thirds of what you used to get, and what you’re getting may not even cover your mortgage. When it crosses that line, it is a sure sign of a housing bubble. When the monthly fee you charge to rent your house drops below the monthly mortgage payment on that house, that’s the sign of a housing bubble. That’s the sign of a supply-side glut of housing, and that’s what’s happening today. In other words, you can go out and buy a home and you can rent it out, but you can’t get enough from the rent to cover the mortgage payment. It’s because there’s a housing bubble.

    Comment by Bhatt — April 15, 2007 @ 4:22 pm

  161. Bhatt,
    I see you have pasted the article of Mike Adams from News Target website.
    But, that’s purely for US Market. Everybody agrees RE or any Market grows to a bubble when everybody invests in it and it bursts when the inflation is enough done. But you can’t just put a US Market Article against Indian RE. Unlike 4-6% unemployment in US, India has 40-60% unemployment. Before bubble even started in US, % of home owners with respect to population is quite high compared to India. We have lot of zonal restrictions in US, India hardly has until now. Husband-wife both working is new trend in India, US it has been happening for past 40-50 years. To top it all, US Citizens are more economically savvy, have more investment vehicles(stocks, bonds, mutual funds, lot of Employer benefits like health insurance,401k, bonus etc, 3rd world country goods/services for cheap etc).

    Except booming IT job market/retail market( more low salary jobs), variable interest loans offered by banks, no other comparison exists between India and USA.

    So instead of blindly going with US Economists, we need to get feedback from our Indian Economists based on more complex Indian RE Market.
    Rent Amount vs Martgage Amount ratio doesn’t make sense in Indian market which is root cause of above topic.

    Comment by Mad4cash — April 15, 2007 @ 6:30 pm

  162. One of my friend bought a pent house in Bangalore for 35 lakhs 3 years back. The same pent house is now worth 1 crore. They are renting the place for 17000 rupees per month including maintenance (3000 rupees). Their rate of return is approx 5% excluding the maintenance cost. Now if someone buys the place from them, the rate of return would be less than 2%. ICICI is giving 9.50% on fixed deposits and the home loans are going at 12-12.5%. Why would some one in their right mind buy that property for a crore. Buying it for a crore at 12% interest would mean that you would be losing 10% every year. Renting is definitely a better option. Just invest your money in fixed deposits and mutual funds. Stay away from real estate market. Also we NRIs can turn this market around by not investing in Indian real estate market. These developers are driving out IT businesses out of India as well because it is way to expensive for a company to setup their shop in India as the renting or buying commercial property is very expensive and the salaries are also going up just to keep the people from not moving. Infact one of my neighbour works for a big company in New York and they are outsourcing to Russia as it is 4 timess cheaper than India.

    Comment by Sandeep — April 15, 2007 @ 8:55 pm

  163. That is scary!!! Our Indians greed shouldn’t nosedive Indian Economy :(
    Yes buying a property for a Crore unless we afford to buy with cash and live in it.
    Hopefully the sanity comes into picture somewhere!

    Comment by Mad4cash — April 16, 2007 @ 3:19 am

  164. Sandeep,

    The example you mentioned is very relevant. For people who bought 2-3 years ago, it will be an investment from the rent point of view. Appreciation is a different thing again. It is like paper money. You will know the current value, only when you actually sell it.

    But why should people buy now for 1 Crore?
    Now, it may so happen that people have money because they sold some other property, and they may be able to buy it. But this is like some chain marketing , where you have to sell the concept to 3 people, and they in turn sell it to 3 others, so on… It may continue for a while, but it got to stop. Then it is going to implode so fast that, you can not get out.

    My advice to everyone is please read the classic “Intelligent Investor” by Benjamin Graham. This book will give you the right perspective of every investment, and not just stock markets. Please read it, if you haven’t read it. If you are thinking that you missed the bus, and you should have bought some property long time ago, read this book. And it will all be clear to you.

    By the way has anyone heard of “Tulip Mania”. Please follow this link, and try to draw parallels between current real estate boom, and the Tulip mania.

    Comment by vasu — April 16, 2007 @ 4:57 am

  165. Dear Friends

    here I give you real example one of my friend and neighbour, he sold his flats in Bandra west in 1 carore to one of sindhi investor he asked him what you r going to do with this flat he said naturaly iam investor and going to hold this flats for 2 to 3 years and give it on L/L rental now he told him iam ready to take this flats on L/L on market price at present this fellow staying in same flats @18000/- per month rent and enjoying 1 caroe NABARD fix deposit , and he is confident that he will get back this same flats @ 60 laks with in comming 2 years

    Comment by Bhatt — April 17, 2007 @ 9:08 am

  166. I am also plnning to do the same thing just sell your flats at current market price to Real estate investor and pay more 5% more rent then market and stay in same flats for 2 years and iam 100% confident that u will get same property at minimum 40% less in comming 2 years so one way this is a excellent oppotunity of short selling in real estate market

    Comment by Bhatt — April 17, 2007 @ 9:23 am

  167. Dear friends

    In USA intrest rate rise just from 4% 6.50% and there is blood bath in all over USA in Real estate sector and plese mind that we are @ 14 to 15% and that also bank will give loan only after tight norms its really sensible to sell flats at current market price and stay in LL for 2 years and buy most pobably same flats at 40% lower , rental market is al most chiper 50% leser then EMI

    Comment by Bhatt — April 21, 2007 @ 12:12 pm

  168. Friends, it is a wonderful blog.I should have seen it before.I am a NRI since 8 years.I feel depressed whenever I call India.I could buy a decent flat in prime locality 8 years back with the kind of money and salary that I had, in Hyderabad.And thats what all I can do after spending all these years away from home.Even now nobody is saying,that the prices would come down there..that is inspite of interest hike,hype and other uncertainities.I somehow believe despite all the reasons given by several gentlemen in other posts, prices are not likely to comedown anytime soon atleast in Hyderabad.One example I can quote friend bought a piece of land at Lahari Estates(somewhere arround Miyapoor,Bachupally area) at Rs. 5800/SQ.YD. in Aug 2006.He asked me to do the same and identified a property after few days at Rs.6500.I attempted to negotiate the price, as it seemed totally unreasonable hike in few days.I missed the deal.I tried to buy couple of times since then, once in Dec 06(at 7500!) and once in Mar 07 at Rs.9000.Now my brother was telling me last night ..the going rate now is Rs.10,000+.
    If there is a bubble burst..somehow I am not able to see it.I agreee prices have stagnated in outskirts.But they are still going up in areas, where there is a reasonable chance that somebody would build a house in next 5 years or even in a decade!Crazy country..

    Comment by Krishna A — April 23, 2007 @ 5:43 am

  169. Krishna….thats the sad thing about bubble…..nobody knows when it will end and what its peak is…

    applying common sense….no matter what anyone else says…..when top earners cannot afford a property that means its not sustainable….

    nothing can stop it from growing to newer heights…..even if it means that a two bedroom apartment in bangalore goes all the way to rs. 1 crore, but avg salary remains almost same…….it is possible

    reason being people are not buying house for the primary reason of living in it….they have a strong motivation that it will appreciate…..

    and since now we are geting foreing investment… may grow more….but one day its going to run out of fuel…..and thats the day its going to take a huge fall…..

    but i would say for indian conditions….for a three bedroom apartment…7-8 times average annual salary is a reasonable price…

    so if we say average salary today is around rs. 4 lakhs…….rs. 40 lakhs is a reasonable for three bedroom apartment….

    and from what i know….bangalore property values had crossed the above boundry a long time back…

    but keep in mind that some locations….there is no upper limit…..since millionaires will spend all their money to buy in those locations…..example being manhatten in NY……around brigade/MG Road in bangalore.. etc..

    Comment by TECHY2468 — April 23, 2007 @ 8:32 pm

  170. I have proof that Bangalore’s real estate market is a bubble…

    In 1999, my uncle, who lives in the US, invested significant sums of money on Nasdaq stocks. A year later, we had to tape his mouth shut about how much money he had made on internet stocks, especially Two years later, I found out he had lost most of his investment.

    Fast-forward to 2007. He is talking about how his two apartments have doubled in two years.


    Comment by SkepMod — April 24, 2007 @ 12:56 am

  171. The biggest reason why this boom is just a bubble and why it can not sustain is because:

    1. The prices are anti-social, only a top sliver of the population can afford to buy the homes being built.

    2. No software person can buy the apartments now.

    3. In India, people can and do stay with their parents until they are in 30s, or even afterwards. So there is no compelling demand.

    4. It is a simple question of supply and demand. About $10b has come into the country, and more is on the way. And a lot more is being raised in the form of IPOs. If all these projects are completed, there will be so much supply that, the houses will go begging. For the same reason, I hope the boom continues for another 2 years, and we get more FDI. then we don’t have to build new homes for another 10-20 years.

    God bless the boom!

    Comment by vasu — April 26, 2007 @ 12:03 am

  172. Also the rupee appreciation is making it harder for NRIs to investment in Indian real estate. For example, a 2500 sqft villa built on a 4000 sqft land by one of the top builders in bangalore is going for 3 crores (I am not sure who is buying it though). Converting this at current exchange rate would equal to $750k. One of my friend bought a villa in new jersey last month for $560k. It is about 3500 sqft (excluding basement) and the plot is also much bigger. I am sure he is also earning 6 to 8 times more than what he would in India. So this basically shows how ridiculous Indian real estate is. Even NRIs working in technology sector cannot buy a villa in India. 4 years back, the same villa was going for less than 50 lakhs.

    Comment by Sandeep — April 27, 2007 @ 4:00 am

  173. Let me provide some update on Bangalore prices and interest rate.

    1. There are projects in Phase I brand new ready to move in apartments are costing less than what builders are quoting for Phase II or later. Sterling apts penthouse, Phase I, in Banashankari is quoted for Rs 3700 and this is negotaiable. I heard for Phase II the Builder asking for 4000+. Brigade dvelopers new project which is is not central at all is asking Rs 4400 for project that is only in plan. One of the Sobha properties, which is in a better location, IMO, a 3-bed quoting at Rs 3300 is still in the market after 3-months. I casually enquired about it but never went to see it. Now I am being begged to at least visit the place.

    2. What this anectodal experience tells me is prices are all over the map. For apartemnts in the same property two different prices quoted in the news paper. Owner-sellers generally more reasonable and RE agents and developers generally tend to hype it up far more than its worth. Speculators are seems to be lying low, or moved to other cities like Hyderabad/chennai.

    3. The fast appreciation of rupee is a definite negative for NRI from US to purchase homes and dampen the enthusiasm of PE players in RE.

    4. It is too early to say this is it. At least in banaglore, Prices are stable or falling depending on the location. Is this prelude to correction needs to be seen.

    Comment by nathan — April 27, 2007 @ 8:55 am

  174. Prices in Hyderabad are certainly stagnated considering the real transactions.Builders still quoting high, otherwise they can not sell the inventory nor can the get the installments for flats already sold(most flats are booked for a pittance.Buyers can as well forego it if the price fall is significant).But the land rates, where there is a semblance of chnace for human dwelling in next decade or so, are still holding up or even going north.
    The rupee appreciation should actually increase the dollar inflow.I am considering even to take home equity here in US and send it to India.I see gains even if I do the fixed deposit @9.5%+rupee gains by another 2.5% per year equals to 12% appreciation.It is huge.If I keep dollars I not only miss this gain but loose its intrinsic value.
    Buying mango gardens may be another option.I sold mine few years back.Silly me.Now it is gone up 3 times.

    Comment by Krishna A — April 28, 2007 @ 7:25 pm

  175. Krishna, could u please explain how rupee appreciation increases dollar inflow into India. Thanks

    Comment by Sandeep — April 29, 2007 @ 6:30 am

  176. I think, I can.If you send your dollars now to India and convert to Rupees, you get 9.5% interest+can convert the rupees into dollars at much cheaper rate after an year or two(assuming rupee appreciates even furthur) thus effetively getting 10-15% more dollars.Imagine you don’t do it…your dollar loose value and need to spend more dollars to buy in rupees.If you do not want to invest at all in India, then obviousely you don’t care what happens to dollar against rupee.But if you want to invest in India then better hurry.Well, I am assuming you will not do the mistake of taking loan in rupees and repaying in dollars.
    It is not correct dollar inflow will come down due to rupee appreciation.Atleast not at these levels.Take loan in USA and invest back in India.

    Comment by Krishna A — April 29, 2007 @ 7:24 am

  177. The discussion is on RE prices and everyone looks forward for its rise, a typical syndrome of “Rich people trading among themselves” to loose something at the end.

    What is the per capital income of the country? With low percapita income, who will be the potential buyer for your RE in India after say 10 years.

    The medium term is pregnant with much risks in the form of a)higher taxes, b)vacant land acquisition c)incapability of the locals to buy or pay the higher rents.

    Comment by RAMARAO — April 30, 2007 @ 1:15 pm

  178. India’s booming growth spurs inflation, putting squeeze on consumers

    (Original Publication: April 29, 2007)

    NEW DELHI – From hefty pay hikes and foreign vacations to new houses bought with cheap mortgages, India’s middle class had never had it so good, riding the past four years’ unprecedented economic boom.

    But now, a spike in inflation is playing party pooper.

    High economic growth, averaging more than 8.5 percent annually since 2003, has spurred demand and caused prices to rise so much that consumers are starting to get squeezed. That could make it more difficult for people to repay loans, which have grown at a faster rate than incomes have risen.

    With real estate and stock prices at record highs, fears are growing that a financial crisis might be brewing if borrowers can’t repay loans. If that were to happen, it would dash hopes that India’s rapid growth would lift millions out of poverty. Overseas investors who have been dumping billions into the economy, would also be hurt.

    To cool growth, the central bank has raised interest rates several times over the last year, forcing commercial banks and housing lenders to increase lending rates, causing consumers with adjustable rate loans – popular among the urban middle class – to see their monthly payments balloon.

    Sushil Aaron, a researcher at a diplomatic mission in New Delhi, bought an apartment last summer even as housing prices soared. But now he has put off plans to replace his old car and has stopped buying books because his monthly mortgage payment has jumped more than 20 percent to $1,000.

    “It’s a double whammy,” he said, referring to surging housing prices and rising rates.

    People like Aaron are complaining despite forecasts from consulting firm Hewitt Associates that salary increases at Indian companies will average 15 percent in 2007, topping Asian countries for the fourth straight year.

    But the millions of poor laborers, who have seen only meager pay hikes, have been hit particularly hard as costs of basic commodities such as cooking oil and vegetables have nearly doubled in the past three years.

    The inflation rate, based on wholesale prices, touched a two-year high of 6.73 percent on Feb. 17 and has since mostly stayed above 6 percent, but retail prices have risen as much as 10 percent from a year ago.

    Virender Negi, a driver for a New Delhi-based export firm, has stopped buying milk for his two children because his monthly salary of $130 is no longer enough to pay for grocery and house rent.

    “At this rate, I will never be able to make my ends meet,” said Negi, who has been borrowing from friends and relatives for about a year to balance his family budget. “I have no money to pay my (6-year-old) daughter’s school fees.”

    The Reserve Bank of India, the nation’s central bank, first spotted what it called “signs of overheating” in November. But officials in the federal government brushed it off until the governing Congress party lost elections in two states because of voters’ resentment over rising prices.

    The government then reduced import duties and banned futures trading for several essential commodities to ease supplies. It also ordered state-run oil companies to cut fuel prices.

    But the impact of those moves, which some analysts saw as coming too late, has been limited, and much of the inflation-fighting task is left to the Reserve Bank of India, which has raised rates three times since December.

    The RBI has also increased the cash reserve ratio, the proportion of deposits that commercial banks must hold in cash, three times since December so to lower the amount of money in circulation.

    Exacerbating the central bank’s problem are the billions of dollars in foreign investment and remittances that have flowed into India in recent years, leaving banks flush with funds.

    In the past two years, bank loans have surged nearly 30 percent annually. Loans to commercial real estate grew as high as 80 percent last year.

    If asset prices crash, borrowers could begin to default on repayments, setting off a chain reaction that could plunge the banking system into a crisis.

    Some of the country’s largest banks have already started reviewing what could potentially turn into risky assets.

    “If you don’t worry now, then you will end up with a price bubble,” said Shankar Sharma, head of Mumbai-based brokerage firm First Global. “And when the bubble bursts, you will have a problem that will last for years.”

    Meanwhile, top officials no longer talk about accelerating economic growth, although until recently the government believed India’s growth rate could move close to China’s 10 percent rate.

    Announcing the latest rate increase March 30, the central bank said its focus has shifted to “reinforcing price stability” from the previous stance balancing growth with moderate inflation.

    “There is a desire to slow things down. The question is to what level,” said Saumitra Chaudhury, a member of the Indian prime minister’s economic advisory council.

    Most factories are operating at full capacity, and ongoing investments would take 12 to 18 months to bring new capacity on stream to match rising demand from consumers, according to a recent RBI survey.

    Comment by Bhatt — May 1, 2007 @ 2:45 pm

  179. its very vise to sell your house at this current price any stay for rental 1 or 2 years its guranted that u will get back same house @ 50% chiper

    Comment by Bhatt — May 1, 2007 @ 3:32 pm

  180. its getting pretty scary….when we hear that the indian banking system may go into crisis because of the real estate loans being defaulted…

    right now in usa things are so uncertain…..that there are forecasts about the dollar losing 30-40% of its value in the next 12-15 months.

    looks like the hard working man saving for retirement is going to pay the price in any case …..while the speculators all over are having a good time.

    i am surprised that the government of india still does not know that the real estate has gone out of bounds……land has become gambling tokens…..and people are going to play with it till it reaches a breaking point…..and then it may bring down the whole system.

    but on the positive side once this thing settles down (assuming that indian banks dont go bankrupt) we will have plenty of cheap developed real estate to continue a slow growth.

    Comment by TECHY2468 — May 1, 2007 @ 7:39 pm


    see the selling price and zillow’s estimate.
    this is near LA.

    i hope this doesn’t happen in india. but it’s scary..

    Comment by thirupathi — May 4, 2007 @ 10:01 am

  182. And here’s one more

    Comment by Mit — May 7, 2007 @ 1:27 pm

  183. And more

    Middle class sinks under EMI load:

    Comment by Mit — May 7, 2007 @ 3:55 pm

  184. The problem in real estate are described below.

    1) first one is the demand is more than supply. simple equation is in southindia alone there are about 400 engineering colleges and every year there are about 120000 ( 400x ~300/college) students are added to the employment and after 2 years time their salary bracket is about 30000/month. these people starts loking for hte house and I do not think 120000 houses are added everyyear in sothern cities.

    2) Second the loan become viable only for those are getting the tax benefit. Hence the FM should discontinue the tax benefit for more than one house.

    3) Black money should be controlled and there should be a strict law in punishing the people who register the property less than market value (actual cost) and those who deal cash transactions. Whoever is buying the house above 20 Laks, his sources of income should be ascertained.

    I feel most of the other factors i feel is already addressed by other friends

    Comment by Johnson — May 8, 2007 @ 11:33 am

  185. Find out whether it is better to BUY or RENT a house for you…..

    Comment by Mit — May 8, 2007 @ 5:32 pm

  186. One more

    Comment by Mit — May 8, 2007 @ 5:50 pm

  187. I have seen one add today for a Bangalore property.One guy is asking approx 2 core for a 2300 sq ft property in HSR layout.This propert is in pace called Parangi Palaya-
    I found is ridiculous………I honestly pray that the price should crash .I also invested in real esate like flat etc…..We also need to think about the common people of this country.It is high time government bring some regulation for the Real estate industry.

    Comment by nsk — May 9, 2007 @ 11:46 am

  188. Today, there was an article in the Times of India, saying that one plot in New Bombay, at a place called Khaghar (quite on outskirts of New Bombay)has been boughtby a builder for more than Rs. 100,000/- per sq.metre (which is approx Rs. 10,000 per sq ft). This is just the land cost. The final price of the building is anybodys guess. I have no idea of what FSI is allowed but even if it is 2, it still means that basic land cost per flat is Rs. 5000. Add construction costs and other taxes etc, the cost for the builder itself would be around Rs. 7000/-. If he sells at say Rs. 7500/- it means that a small 2BHK flat of about 800 sq ft will cost Rs. 60 lakhs. Add stamp duty, registration, maintenance the initial cost to customer will be around 66 lakhs. This comes to about $165,000. Now for a person who has $165,000… will he come to stay in Kharghar? And do persons who stay in Khargar now, have $ 165,000? And if you had this spare cash, would you buy an apartment in Kuala Lumpur, Singapore, Shanghai or USA… or Kharghar?!!!
    Note, this place Kharghar is on the very outskirts of New Bombay (not Bombay itself). Surrounded by marshy land, mosquitoes, power cuts, etc ,etc. I wonder how high the balloon will fly before bursting…..

    Comment by Mandar — May 9, 2007 @ 7:42 pm

  189. Media added fuel to the fire of RE boom to keep up their classifieds. Media needs booming businesses to keep up their business. News papers like TOI always project upper class life as the real world and make common like you and me to run for that.

    Unfortunately the middle class section flying in colors after seeing their fat wallets. The false prestige of these people is the real cause of high RE prices. We gave opportunity to the builders by asking soo much crazy stuff which is not must for living.

    And also lot of NRI’s bought apartments by asking one question “How much it will appreciate by next year?” And the answer from the broker will be “Sir, It got doubled in six months. So I will appreciate”. Now the reality is, people invested in apartments have returns at 3% or less and who invested on land having no returns. They are all depends upon appreciation of their properties. If properties depreciate then their money is gone.

    Today it is very tough to sell a reasonably priced property due to interest rates and $ price. Friends just beware of the RE scam and get out the feeling of “Money invested on land never Lose”

    Comment by Durga — May 10, 2007 @ 1:02 am

  190. Here is what the chairman of State Bank of India said currently (27th April 2007).
    “My guess is that NPAs will mount in real estate and SME sector because of the exorbitant interest rates charged there. Housing sector may bite.”
    State Bank of India’s net non-performing assets in the home loan sector have risen by 50 basis points to 3-4% in 2006-07, reported by its chairman O P Bhatt.

    Is it the beginning of the end?

    Comment by sanjay — May 10, 2007 @ 4:18 pm

  191. Many new flats are available Mathahalli-Sarjapur outer ring road ,Bangalore now.Average cost of a flat here is 60 lakhs+Registration.The SALIENT feature of this LUXURIOUS apartments is -there is no WATER availabilty here.So everybody buys water and spends 2500- 3000 rs every month.Also I did a calculation.Anybody who wants to buy a flat here has to take a home loan of Rs.50 lakhs.Today the emi works out around Rs.45000/- .I am just wondering whether we have so many such rich people around.Anybody who can afford such a monthly emi should have an annual salary close to Rs.20-25 lakhs.

    Comment by nsk — May 11, 2007 @ 11:44 am

  192. nsk, more over you can rent those same apartments for max 15000 rupees a month. So why would anyone buy an apartment for 60 lakhs. Logic still defies me. As far as NRIs, they can keep that money in the bank, earn almost 6 lakhs a year in interest and if they rent the place, they’ll be still left with 4 lakhs every year. At current level, Bangalore apartments are 60 to 70% the cost of a buying a condo/apt in east coast of USA (new jersey and virginia). Villas in Bangalore are much more expensive than the same ones in New Jersey and Virginia. Basically builders and brokers have been taking everybody for a ride. Indian middle class will be working for banks and developers for the rest of their lives. People used to be very happy, content and stress free in life. But things have changed for the worse.

    Comment by Sandeep — May 12, 2007 @ 8:38 am

  193. I have seen a little of this phenomenon….am sure many wud know abt this…..the skyrocketing real estate prices across India has been majorly contributed by investors(speculators n arbitrageurs might sound harsh)who buy the house to sell it in the near term…say 6 months to 1 year. more so…….because the profits are at times.
    take this….
    you expect the prices to go up by 15%(conservative for all operating bulls)over a year. so you go n buy a property of …say 5 million…..under construction(all thats real is the architectural plan on papers)……u don’t need to cough up all the money initially. The standard procedure is u pay in phases as the property approaches closer to possession. u just pay up abt 10%(Rs.500000). U have sound financials and therefore u approach a bank for a home loan which u easily get. U r lucky n ur loan gets approved……no its not over yet…… u don’t disbursment of the full 5 million loan….u just take rs 500000 as the first disbursment. so u pay interest for only that amount(that works our to Rs60000 @ 12%p.a. and rs 30000 for six months)….that’s ur COST…….SIX MONTH DOWN THE LINE THE PRICES GO UP BY SAY 10%……U THINK ITS TIME TO OFFLOAD……..U SELL THE FLAT TO A BIGGER FOOL AT Rs 5500000……prepay the loan…..ur cost is just the interest of Rs30000 pay in those six months. UR PROFIT(5500000-5000000-30000)……THAT’S RS 470000 ON AN INVESTMENT OF RS 30000…………THAT’S ONLY…1566%PROFIT…….R U GUYS NUMB BY NOW……WELL THERE R MANY WHO HAVE MADE MONEY THIS WAY……ITS NOT ALL THAT EASY THOUGH…..THE PROMOTER TAKES A CUT FOR FIND U A BUYER(READ BIGGER FOOL)……………..CHEERS…!!!!

    Comment by Yankeedude — May 12, 2007 @ 5:27 pm

  194. i know some folks have claimed that NRI can deposit in indian banks and get a nice ~10% return..and i would readily jump at this opportunity..
    however, indian govt is still leery and does not allow repatriation of funds back to US in this case ( i think it is calles (non FCNR , rupee account)
    If i want flexibility of repatriation, and i know i need it as within a yr or 2 , indian economy will crash and foreign reserves will flee, i want my investment back to the safe haven (USA), but for that leery and chicken little indian govt has created FCNR /NRE etc account where the interest rates track US rates..
    If some one knows otherwise, i am all ears.
    Lo and behold!

    Comment by andiron — May 12, 2007 @ 6:26 pm

  195. I feel yankeedude’s put it extremely well. That is exactly what is happening. For genuine buyers like me it is an excrutiating wait.
    I visited a real estate agent in Delhi’s Saket area and he quoted Rs 70 lakhs for a two bedroom decrepit DDA apartment in the neighbourhood. Saket has shot up in value because of some malls that have and are coming up in the area. The asking price for a 3 bedroom DDA house in Vasant Kunj is 90 lakhs. Sensing the horror in my voice, the estate agent informed me that the flats had gone for as high as Rs1.25 crore recently. Can you imagine that for a DDA house?!! These house were built by the government agency for the middle and lower middle classes. Now what I cannot understand is who is buying these houses? Who has the kind of money?
    When I remarked that the price was way too much, the estate owner said, “Yes, I think so too, but the owner is asking for that price. He is in no hurry to sell it and is willing to wait for two months three months till he gets a buyer. Would he get a buyer? The estate agent was optimistic. “Yes, just two days ago I closed a deal for Rs 90 lakhs in the area,” he informed me.
    But then, I found that the estate agent in Saket had started selling air coolers and air conditioners from his little shop. There is not much business in real estate, he explained.
    And is you have been noticing the property section has very few adds from Delhi. There are more ads for sale of flats and houses in second tier cities and other metros.
    Omaxe is selling a three bedroom flat in Greater NOIDA for Rs 53 lakhs. Greater Noida is like going into the jungle. But there is the promise of a metro reaching there…if not a metro then a mono rail…
    Mixed signals? But I have yet to see the prices coming down.

    Comment by SVee — May 14, 2007 @ 10:32 pm

  196. Dear friend,Don’t buy thi Saket flat.I was living in a DDA flat in Saket for 7 years.-2 bed room
    People were quoting 40 lakhs till last year.These are 25-30 year old flats.In summer there is no water.It is not worth it.

    Comment by nsk — May 15, 2007 @ 12:05 pm

  197. There’s a strong mindset that real estate always goes up in the long run and corrections are never more than 10-20%. Well, it’s very true with one caveat though. Indian “long run” used to be 30-40 years (remember that uncle who bought a plot for Rs.20K in 1967 and now it’s worth 1 crore) but lately that long run has shrunk to 2 years. Moreoever that uncle put all his savings of Rs.20K in buying that plot and borrowed money from relatives to build a modest home where he planned to live for next 50 years. It’s great that we now have long term loans/mortgages available in India but are we ready for directly importing these concepts from developed world. I don’t think so…we first need transparency in real estate, wipe out black money, have accurate data on employment and other metrics, we need to coach our banks in ensuring due diligence before lending loans unlike ICICI morons calling every one. Even the so called job growth in IT/ITES is based on flimsy foundations. you think come 2025 (when our current loanees would be writing their last check!) we would have 10 times more IT jobs?!?!

    just hang in there and rent out till this madness’ll find lot of them jumping off of buildings…after all there’s a reason we have high rises.

    Comment by ashutosh — May 15, 2007 @ 3:56 pm

  198. NSK, Thank you for the advice. The Saket flats for Rs 70 lakhs is daylight robbery. One would have to be really desperate to own a place to pay that kind of money or to take a loan and be in debt for the rest of one’s life.
    Did you see the news today? Of how there are no buyers at the DDA land auction for hotels. The high reserve price seems to be one of the reasons. And there is a big worry that Delhi will not have enough hotel rooms for the Games in 2010. Well! To think that the government itself has been a party in hiking up the land prices.
    The so called reputed builders have also been hiking up the prices at each successive project launch. A Gurgoan builder told me a few months ago: Even the mud in Gurgoan is worth its weight in gold!
    There is no water in Dwarka where DDA is trying to sel its land for hotels. A resident of the area informed me that he buys bottled water in summer for a bath!
    Saket too has no water. The massive malls that are coming up are guzzling it. The residents had organised a protest but nothing much seems to have come out of that.
    Well there is no choice but to stay on in our rented apartments and hope for the great price fall one day. Let us hope it comes. Otherwise the middle class will not be able to own a house in Twentyfirst century India.

    Comment by SVee — May 16, 2007 @ 6:27 pm

  199. Wait for 6 months to a year. The property crash has been on for 2-3 months with serious reductions in gurgaon prices of apartments. Even todays economic times was full of “desperate sale” ads. The bubble has been pricked and will deflate within 6 months to a year. Buyers should form an unsaid cartel and refuse to buy anything at less than 40% discount to asking price.

    No need to buy a house if annual rental cost is less than interest cost of capital + taxes by more than 10%

    Comment by Knight — May 17, 2007 @ 7:11 pm

  200. good point Knight. This is very true in all major cities of India. Renting is very cheap compared to buying.

    Comment by Sandeep — May 17, 2007 @ 11:56 pm

  201. Hello, How is the real estate market in Chennai? I am confused now…. please share your thoughts on real estate market in Chennai.. especially Tambaram, Perungalathur area.

    Thanks. Raj.

    Comment by Raj — May 18, 2007 @ 6:07 am

  202. Its show time

    Comment by BGS — May 18, 2007 @ 8:33 am

  203. This is just the beginning… the prices are set for a bigger plunge…. wait for the right time to buy….

    Comment by Raj S — May 18, 2007 @ 9:12 am

  204. I have been following the property markets here in the US for last three years. The party here is over, the market it seems had peaked in mid 2006. Since then the prices have gone down a bit but they haven’t fallen more than 10%-15% percent. I have been expecting a bust. But now I realize that the prices will take mcuh longer time to come down. May be another year or two. The number of homes for sale in the market has gone 3-4 times from the levels seen in 2006. Lenders have started foeclosing on homes, but those properties are not on the market yet. Once these come on the market the prices will be further depressed. Another interesting thing is that many of my collegues who have been waiting, actually went ahead and bought homes. They are fully aware of the bubble but yet they think that the prices probably won’t go down much. I beleive that the downward trends (just like the upward trends) are very powerful, meaning they last much longer than what we expect.

    I’m very sure that the indian market is going to correct. All my family members, don’t believe that, but I persist. They think India and US are different. I believe that human nature causes these bubbles – be it US real estate, India real estate, gold, stocks, tulips (the Dutch Tulip Mania of 1800s). And all bubbles eventually are busted.

    I’m hoping that the Indian real estate bubble will bust faster than the one in US.

    Comment by Prashant Bhagat — May 18, 2007 @ 7:50 pm

  205. Prashant, tere moome shakkhar. I am waiting for the Indian RE bust as well.

    Comment by Sandeep — May 19, 2007 @ 12:41 am

  206. It is a proved theory that the bottom-line for any investment is returns. The rental income is the better yard-stick to measure the worth of the real estate investment in short or long terms. Unfortunately this rule of the land does not apply in any growing economy (especially in India). In the long-term (5 to 15 years) the rule (value of real estate property = monthlyRent * 12 * (11 or 12) is going to be applied.

    The matured economies like USA the value of any residential house is equal to or less than monthlyRent * 12 * (11 or 12). For example: if the rent is $ 2500 the annual rent is $30000 the buying price of this property is not more than $300,000 to $350,000. Considering the Indian situation, the growing population and the scarcity of land in the primary locations of the metros…. The 11 or 12 factor could be 20 (reasonable) any thing more than this is not tenable.

    The Real Estate trends in Tokyo:

    Comment by Raj S — May 19, 2007 @ 4:45 am

  207. growing population means higher multiple??
    better say, growing median income means higher multiple..(deflate it though by ~8% indian inflation)
    check the median income of indians in different places and check the prices..
    of course, Bhidwadekars living in dharavi claim to be living in a very expensive real estate and yet drink tea out ot sewage water!
    Of course, in mansoon, subtantial parts of mumbai real- estate resembles shantytown.

    Comment by andiron — May 19, 2007 @ 9:20 pm

  208. Though the volume of transactions in real estate market has come down due to high interest rates in home loan, the money is still pouring into the indian market and economy is still booming. People are saving money and would wait the real estate market to come down to buy their homes.

    So if a flat which costed me Rs. 10 Lacs before 2 years and which is costing me Rs. 30 Lacs now, would go down to say around 20 Lacs. As soon our prospetive buyer sees this, he would plunge into it irrespective of interest rate even as becuase the rentals are increasing. And the real estate market would boom again. So don’t expect any drastic crash except that IT/ITES market goes down.

    Comment by Mit — May 21, 2007 @ 4:53 pm

  209. At this moment in Chennai, the possibility of prices coming down are almost nil. I observed that In NCR the prices are down a bit. I am regularly enquiring about the land rates in suburbs in chennai still it is going up only and the steep is more sharp nowadays. I am still thinking am i fool or the people who are buying are fools. Only God has the answer.

    Comment by Johnson — May 21, 2007 @ 5:49 pm

  210. right now it is definitely a suicide to buy at this juncture…..there is hardly any room for any price appreciation unless you buy in a remote location which becomes a big hit in 2-3 years…

    read this article about japan’s bubble:

    prices fell 100 times in some areas….makes you wonder how high speculation can lead to?

    i would use a simple rule of thumb:

    take average salary in the area…..a house price in most good locations should not be more than 8-10 times, strictly….over here in usa….its usually very high if it is more than 4-6 times the median salary.

    if for sake of calculation we take 8 lakhs as the median income in bangalore…..a three bedroom house in most good locations should never be more than 65-75 lacs.

    but we all know that right now for 60 lacs we can get only a apartment in a good location.

    i wonder how people are buying apartment for such high prices….given that the life of a apartment becomes almost nil after 40-50 years (after 30 years….it should be 50%)

    Comment by TECHY2468 — May 22, 2007 @ 12:32 am

  211. In USA, banks generally use 30% of your gross as the maximum a person can afford to pay towards mortgage. So 30% towards mortgage, 35% towards taxes would leave 35% more for other expenses including savings. This would hold true even for India cause taxes are in similar bracket. So if a person is earning 8 lakhs per annum, the maximum affordality in terms of annual cost should be around 20 thousand rupees per month. Right now, you won’t even get a 2 bedroom apartment in Bangalore for that EMI. Now lets consider tax benefits. For maximum benefit, lets say the person is a woman. Rs.145,000 is exempted for tax and Rs.150,000 towards house. So taxes on Rs.505,000 would be Rs.120,000. Add provident fund and so on to that, say total Rs 2 lakhs out of 8 lakhs goes towards taxes and provident fund. Remaining 6 lakhs come out to be Rs.50,000 per month. How much do u think a person can spend towards mortgage. Lets take 50% of the after tax earnings in the above case. Do u think you can find something for Rs.25000. Even if you do, add maintenance, car loan, that flat screen tv, …. I don’t think I can manage all that with 50k per month.
    I would rent the same place for 10 to 15k and wait for price to drop. It will happen. It is just a matter of time.

    Comment by Sandeep — May 22, 2007 @ 3:20 am

  212. I don’t know man. May be the prices will fall, or they will go up further by 100-200% in a year and stay there. It is hard to predict with the paradigm shift that is happening in India.

    Comment by Vasudevan — May 22, 2007 @ 4:47 am

  213. Govt hopes slow down of external debt to real estate: FM

    Lately, but our FM has woke up from a long sleep. But this is not going to affect the foreigners investing in Indian Residential Real Estate market. But it would have an effect on commercial market. commercial RE prices go down, residential RE prices are definitely going to come down.

    Comment by Mit — May 22, 2007 @ 9:25 am

  214. I was living in Chennai from 1999 to 2005 and that time I was living in a rented house at T nagar paying around 6000 for a two bed room set. In those five years, I was never seriously looking for buying a house as my flat was quite convenient and close to all places.

    But I have made enquiries on subday hindu paper and found that some prestigeous locations such as GN and VN road, the flat > 10 Yr old were selling around 2000 Rs per sft. i have also inspected a few flats. I actually found a 3 br flat in VN road which is a very good builder and was very good locality. The owner was already having an offer of Rs 19.5 and was asking for registration. the flat was 17 yrs old. But very good construction and the land share equal should be approx 400 sft and the flat 1220 sft. i did not persue further. I left for delhi in 2005 and am here now and would like to settle back in chennai now. when i made enquiries to buy a flat, i am in for a shock. a 900 sft flat in melony road is costing rs 50lakhs. i am a salaried person and i have to take 85 pc loan. approx the monthly emi for this will be around Rs 60000 for a 10 yr loan I am already 54 and assuming i work till i am 65 actively, i dont think i will be able to afford this. even if a person of say 30-35 age group is going to buy this, with the loan period of 20 yrs. the EMI shall be of the order of Rs 35000 or so. that too for an old 2 br flat of 950 sft.

    I do not understand the logic. even of both husband and wife are working each earning rs 30000/ per month, will tshell out 35000 every month for the next 20 yrs till retirement to buy a flat small and live there throughout their life. it does not sound logical. i dont think anybody with a sane mind will buy this property for their own use. even for rental, i dont think, it is going to give more than rs 7500 per month as rent. maximum rs 10000/ as rent. then who will buy this. obviously persons with black money or real estate speculators will buy this.

    the truth is the so called boom in the real estate in chennai is actually a big bubble waiting to burst. when the metro comes and people start moving out of town to places like omr, maraimalai etc., the dip in chennai will take place with the so much pollution in t nagar and other areas, it is becoming a health hazard. but in places like guduvanchery urappakkam, still the land values are affordable. for rs 12 lakhs, u can get 2400 sft wherein u can buid a 800 sft house for a 1000 rs per sft. total cost of the house will come to 20 lakhs maximum. this will also have open space of 1600 sft and is expandable as the family grows. only problem is commutting to work, if It shifts to south of chennai, this is the best.

    so i decided not to buy a flat now in chennai instead buy land outside near urappakkam or vandalur etc., which may slowly appreciate at the same time pollution is not there. but we need entertainment like malls, movies etc., and the infrastructure like shopping etc., also should improve these areas like noida or gurgaon, then it will be good. chennai is not having a good concept like noida or gurgaon or faridabad which is equally developed like delhi. i think this should happed and this is started happening

    Comment by Gopalan — May 23, 2007 @ 5:28 pm

  215. I agree with you Gopalan……but as far as i know people are not smart anywhere in the world..

    1. some jump in beleiving they are going to make money no matter what (buy a 3 bedroom apt for 60 lacs sell at 1 crore after 2 years…they think it is possible)

    2. some people get scared that if they dont buy now….they will never be able to afford and they jump in (most genuine buyers are in this state right now)

    3. people are thinking that since its appreciating it does not matter if they are paying rs. 25k for interest only……which is way more than rent for similar unit….they think they are getting rich because of appreciation…

    Comment by TECHY2468 — May 24, 2007 @ 11:26 pm

  216. Housing investment justification in major metros in India:
    Housing loan interest rates: 14 to 15% pa (current)
    Loan period: 12 years (144 months)
    A 2 bed room in prime location in south Indian metros, Chennai: Rs 55,00,000
    Registration and interiors: Rs 5,00,000
    Total: Rs 55,00,000
    The down payment Rs 10,00,000
    The Loan Amount: Rs 45,00,000
    EMI on the loan amount: Rs 67,540
    The opportunity cost of Rs 10,00,000 @ 9.5% pa = Rs 7,916 per month

    Total repayment to the financing institution (through: 2019): Rs 67,540 *144 months = Rs 97,25,760
    The down payment with principle and interest through the year 2019: Rs 29,71457 (@ 9.5% pa on Rs 10,00,000)

    The average rent for the same property: Rs 20,000 per month (currently it is around Rs 10,000 and considering it reaching to Rs 30,000 per month in the year 2019): Total rent for 144 months: Rs 28,80,000 (this is very optimistic calculation)

    Total investment:
    Total loan repayment: Rs 97,25,760 + Rs 29,71,457 (maturity value for the down payment) = Rs 1,26,97,217

    Total cost of the property = Total Investment – Total Savings in the form of rent
    Rs 98,17,217 = Rs 1,26,97,217 – Rs 28,80,000

    The value of the property in the year 2019 (applying monthlyRent * 12 * (11 or 12) ):
    If: Monthly Rent: Rs 30,000 * 12 * 12 (International factor) = Rs 43,20,000
    If: Monthly Rent: Rs 30,000 * 12 * 20 (Indian factor) = Rs 72,00,000

    The hidden cost of loan repayment (until the year 2019) and its investment value (return) is not considered: If this is considered then the cost will be much higher and the returns from the investment be much lower.

    Conclusion: At these prices it is only be purchased if one is particular about the location (fancy) where the property is located and NOT with its intrinsic value or an investment potential for a big jump in appreciation any time soon.

    Comment by Raj S — May 25, 2007 @ 4:38 am

  217. Raj S

    I done this calculations in the year 2004 and dropped the idea of purchasing the house.

    now you see the wasted opportunity

    Comment by Raj G — May 25, 2007 @ 9:33 am

  218. It is basically to rent or to buy decision. If you have your own money to buy, it is better to buy. assuming you have 50 lakhs cash with you or fixed deposits with you or stocks, mf with you which are earning approximately around 15% interest overall, and you dont hope to jump into an adventurous aggressive bandwagon of smart investors, it is better to buy a property in a prime location such as T nagar, Mylapore, Mandaveli, or Adyar. This will aproximately yield a rental value of around 3.0% and a normal capital appreciation of 14.5% which works out to around 17.5 % annually. So the nett gain you get is around 2.5% per annum. But if there is a boom like 300% increase in three years like 2004-2007, then you stand to gain much more. But this kind of a boom is not sustainable. I heard one broker say that the price now is the price of 2011 or so. And afetr this either it is going to be stagnant like in Mumbai or slowly increase in line with inflation and improvement in the earning capacity. However the fact remains one needs a roof over one’s head whether rented or bought. we cannot say universally that renting is better than buying or vice versa. Then nobody would build houses. Where will the tenant go?

    In Gujarath for example, there is not much question of rental as people there live in their own houses and those who stay in rented houses are from the other states. But in Chennai, we cannot say this. Around 60% people live in rented houses only. The dream of every person is to live in his “OWN’ ” Sondha Veedu” howmuch ever sacrifice he needs to make. It is I think much more than the mere economics of it. But has more intangible sentimental value. In tamil movies also, wee see so much of sentiments attached to Houses. Like in Paddavar Bhumi or in Varusham 16, the house plays an important character. I heard many people say I want to die in my own house. It has become so much attached to one’s life, I think it is difficult to merely calculate the values and decide. This is one thing that the brokers and the land sharks are taking advantage. The population is increasing, But the rate of increase has definitely slowed down and with mobility and urbanisation and the housing market should exhibit maturity and grow slowly and steadily but definitely not like Chennai in the past 3 years.

    Another thing we are forgetting is that the life in the so called ” Prime locations’ are not as convenient as living in the outskirts any more. With so much of vehicular pollution, Parking problems, Water scarcity ( This factor I think the average chenniite has forgotton due to the confortable situation which is present now which is make believe that there will be no problem in the future. I would never forget the days in the period 2000-2004 summer where on many days I had to go to office without a bath that too in the horrible sweaty summer of Madras. people should remeber that we are sitting on a volcano as far as water is concerned. Regarding roads, The digging was a constant thing in madras. Especially I think St Mary’s road would have been digged more than Mohanjedero and Harappa or the Egpptian Pyramid area. Life in Chennai is not all that comfortable, In that area there is no good park also to go far a walk. sometimes I go to Nadesan Park or Panagal Park. But walking there is again a BIGG group and oit is also like walking and moving like in Ranganathan street. so much crowd. Panagal park ? Horrible! They should first remove all the hoarding and let sun ligh pass through to give life to the plants. These texile shop fellows, all around tha park, like nalli, Pothys, RNKV, Kumaran, Chennai silk etc., just spare their 1 Hr profit per annum, the park can be made much more beautiful. These people are so unethical, They make big shops and attract crowd, make a huge profit but do nothing for the scoiety.

    So I think coming back to Chennai properties, I think it is high time Government puts a regulation. In stead of interfering in Cinema to keep tamil names or to control the price of Idly in hotels and to distribute colour tv’s to hungry and homeless people who can watch it and wonder at the amazement of the government achievements, the government should do something for the housing needs of all sections of the society. They can give incentives for companies which move out their office out of chennai by 25 KM. In Delhi, big companies such as NTPC, BHEL, IOC, IFFCO etc., have moved out of delhi to the suburubs. But in Chennai, nobody wants to move out of Mount Road ( Anna Salai? ) PH Road or Parrys.

    I think first of all Government should move out of Chennai The Givt offices should move to as distant as Near Kancheepuram or Chingleput. The land is plenty there. Once this happens, The mad ruch to T Nagar and Mylapore shall stop. Another thing is Shopping. Why should all the jewellery shops and textile shops should be located in Usman Road and Panagal Park? They can also move to another area. In chennai we do not have separately identified residential area and commercial area. VN road which was basically a residential area has noe become a commercial area. Similarly Burkit road whcih ia slso basically a residential area has become a commercial area and the prices are going through the roof. First of all identify commercial area. In my street, one fellow a large hotel owner was about to buy a house in a purely residential area and start a big hotel there. Lickily that did not happen. But there is a fear of thi s happening anytime.

    There is no conclusion, only some discussion. Now I think the time is not ripe for buying property in Chennai. On the contrary if you possess some old dungeons in Sandhu etc., it is high time to book a mammoth profit and invest it in land outside chennai or in good MF and stocks.

    Comment by Gopalan — May 25, 2007 @ 2:02 pm

  219. Continuing with my musings on chennai properties and how they stand.

    I was telling about whether to buy or rent decision. It will be worth while to rent in Chennai proper till some time as the rentals are still not catching up with the price. The normal rent one can pay is around 30 to 40% of the take home pay. Beyond this people cannot pay. Considering that the man decides to borrow abd buy, He needs to have at least 20 yrs of service in ordewr to buy at an emi which he can afford. and also he should have some savings. I am talking abiut the wretched middle class. not talking abut the people born with the silver spoons. if a person has to stay in a rented accommodation for x amount he will be only willing to live in the same type of accommodation. that is a person paying Rs 10000 per month in rent in a say 1000 sft house will not be ready to shift to buy and live in a 750 sft house because it is his own. Now comes the crutial question. the rent vs the cost ratio which is very important. for living in own house, he can pay upto two times the rent to possess the house. say 20000/ per month with difficulty. For 20000 rs for 20 Yrs yuo will get a loan of only rs 18 Lakhs which is 85 percent the cost of the flat he can aim is Rs 21 lakhs. but to day for 21 lakhs it is not possible to buy a house or flat of the standard where he is presently residing by paying 10000 rs rent. This is the paradox. he would preferm to stay in the rented house since even if he buys for rs 21 lakhs which will roughly give him a flat fo around 550 sft in the sam locality which is not acceptable. at the same time he needs to lose another 10k extra to pay for the emi. that also for the next 20 yrs. one more thing we need to consider. in 20 yrs even iof assumimg a normal carees grouwth, i expect him to grow in status. then he definitely will not like to live in the same flat. his family size may grow. he may like to shiftm to a spacious premises. he needs to go in for another loan and also by short sellingn this flat at a prevailing rate and buying a larger apartment.

    with the existing rate of increase in rates beats the basic laws of the economics. hence it is only manipulated and not a natural hike. it is not sustainable. it is more of a greater fool hypothesis. something like multilevel or chain marketing. this will break down one day. it acn continue if madras becomes a heaven like water always in taps. buses stop in bus stops.the air is full of 99 percent oxygen. the roads are so much broad and we have too much parking space, autos put the meter, the street vendors shout is understandable to a stranger. every body salary is doubled every year. chennai will host the 2020 olympics. chennai will be the it capital of world. anna university becomes better than MIT.

    If pigs have wings?

    Comment by Gopalan — May 25, 2007 @ 7:11 pm

  220. Raj….we underestimated the speculators in 2004.

    I started paying attention to india real estate only since mid 2006, and by that time only reasonable purchase is a land in slightly upcoming area (not more than rs. 1000-1300/sft)………that too if you want to build a house to live not as a investment.

    of course specualtors are most welcome to invest at any given time…..since you never know…you may still make some money in the next 3-4 months….

    as i have already mentioned… Tokyo….in some locations property prices have fallen as much as 100 times………..

    so just give a thought if that happens in india…..for the highest priced apartments (say 2000 sft) selling for 1.5 crore now….may come down to 40 lacs…… scary is that for the genuine buyer….

    Comment by TECHY2468 — May 25, 2007 @ 8:37 pm

  221. Hi Raj G,

    I have done the same calculations in the year 2003 and purchased an apartment in the year 2003-2004 when the prices were reasonable to my calculations and the prices (then) were very less in international standards. My calculations do not mean that they are 100% going to work. But to my knowledge and understanding of the market they may be relevant in 2007.

    “The element of risk goes between missed opportunity and blocked investment”

    Comment by Raj S — May 25, 2007 @ 10:00 pm

  222. Hi All,
    I live in US and had been to India(Hyderabad) for last 40 days. I already missed the RE boom happened until now. After seeing the Duplex home prices in Hyderabad, I have decided that I will be forced to stay in US. They are quite high and with their rate of appreciation soon they will be unaffordable to me.
    65Lakhs for a OK Duplex home far from Center of the City ( AS Rao Nagar etc) with 12% Floating EMI means : every 8 years the home should appreciate at least another 65Lakhs. So as an investment it is ruled out. As a permanent abode, I have to drive my lion share of savings (after all other expenses like rents,utility bills, credit cards, 401k, etc are paid for) to pay that monthly mortgage. I have enquired the rental potential and astonished to know that it is 8K per month !!!
    Either I missed the cycle miserably and God will help me Or the Market is darn crazy!!!
    On top of it, there is a talk about $ sliding down further 25% by the end of this year.

    Comment by Mad4Cash — June 1, 2007 @ 1:43 am

  223. Been watching the discussions.. Looks like many who missed the investment opportunity are hoping for market crash to jump in.

    1. “Value” which is confused with “Price”.. Price is market driven and mostly not related to rent and all that.. (like Gold – it has price but Zero real value). Only once – back in 1997 – I could purchase an aparment where EMI matched to rent (outflow some where else)! Must have been lucky.
    2. Too much is at stake for markets to crash.. Yes, in some pockets there would be corrections of 50% magnitude (eg: Hyderabad – thats where I am currently based).
    3. Historically – over and over again- it is proven that real estate is good long term bet.. So, if you do get some oppotunity with money that you wont look at, put in. Probably next 6 months would be best time.

    Comment by Sayaji Hande — June 1, 2007 @ 4:46 pm

  224. i disagree with you sayaji…… matter what anyone says the RE is very much overpriced……..and its not supposed to stay there since that means cost of doing business will be much higher…

    i spoke to my friend who works in top five IT company in india, he is in hyderbad, he gets paid 8 lacs, guess what not enough to buy a house, because he cannot even get loan for more than 25 lacs.

    the current RE market is purely specualation, as it usually happens when a ton of FIAT money become avaialable, say thanks to the government that they stopped foreign inflow into RE, otherwise RE would have had such a big crash due to oversupply…

    mark my word, a price of a house is never sustainable for more than 5-6 times median annual salary………and that calculation is for interest rate of 6-8%……currently its 12-13% in india. which means people must be paying upto 80% of their disposable income towards mortgage…..thinking that the appreciation is their savings…

    Mad4Cash: wait for 2 years……you will see the market return to sanity….that house you are talking about will be available for around 35-40 lacs. till then invest your saving and rent.

    Comment by TECHY2468 — June 1, 2007 @ 7:18 pm

  225. BTW….even though i thought that the market was overpriced…..i did invest in a land (30X40) in bangalore since i thought that the deal was not bad (rs 1300/sft, kanakapura road)……and its not a investment property but for primary residence…….hence i dont care if its price goes down to Rs. 800/sft.

    so if you find something like that…..and you are looking for a primary residence go for it……otherwise stay away from any deal costing more than 40 lacs for now.

    Comment by TECHY2468 — June 1, 2007 @ 7:22 pm

  226. Thanks TECHY2468,
    Like you mentioned, I will wait a while. Instead I am investing in 2-3 smaller properties (6-8 lakhs) in my native town where there is lots of RE growth (not boom!) now-a-days.100 SQyards/Rs 1 Lakh 4 years ago grown to become 3 Lakhs and the rentals are almost half of my EMI there
    (6Lakhs ~ EMI 7000.00 and Rents 4000.00 pm and hence my mortgage is only 3000 pm)
    I will buy in Cities when sanity comes back.

    Comment by Mad4Cash — June 1, 2007 @ 8:14 pm

  227. Mad4cash,

    Stop dreaming and get back to reality, onc ethe price has gone its gone up for good there is no question of it coming down at least in India,its unprecedented.

    I suggest you go back and live in your SMALL town.

    Comment by Observer — June 2, 2007 @ 8:44 am

  228. Observer, start observing. Between 1995-2000, prices dropped by almost 70% in many parts of India. I suggest u come out of your shell.

    Comment by Mad4cash — June 2, 2007 @ 10:42 am

  229. Thanks for your comment Observer!
    Somebody took the liberty and (mis)used my id Mad4cash and answered this post!
    Observer, start observing. Between 1995-2000, prices dropped by almost 70% in many parts of India. I suggest u come out of your shell.

    Comment by Mad4cash — June 2, 2007 @ 10:42 am
    Like I mentioned in my reply to TECHY2468,
    I cant afford those insane prices, hence will buy in my town. When the sanity returns either to the prices or to me ( by becoming more rich to afford those prices), I will invest it.
    God has created a path called fate for each individual that one can’t escape. So ultimately destiny matters. All we think wise actions at the moment can/can’t be so on bigger time axis. Only time will tell that :)

    Comment by Mad4cash — June 2, 2007 @ 9:42 pm

  230. simple rule.

    if some one making 10 lacs…cannot get loan for more than 35 lacs…….how can he afford a house for more than 45 lacs….

    it cannot go on, right?

    i am glad that the banks are not extending 30 or 40 year loans……there is not limit to what people can do.

    just look at california……i know some one who earns $180k/year……..but guess what he bought a house for around $900k in 2005, very bad timing….

    i am estimating that he must have taken loan for around 700k, interest @6% = 42k per year….

    even though he makes a ton of money…..its all going into his mortgage….and home prices are depreciating……..

    he is the one left holding the bag……..and he better keeps earning that kind of money to service the mortgage…

    Comment by TECHY2468 — June 3, 2007 @ 2:53 am

  231. Have a look at this article -

    Comment by SVee — June 3, 2007 @ 7:31 pm

  232. Guys – You may disagree.. But, I still would say – at this time, if you get an apartment at Rs. 2k per SFT.. (or Rs. 1.5 in upcomming metros) – jump!

    Over and over again – it has been proven that the real estate gives good returns. Yes – we are no where close to what happened in Japan (and market remained subdue for 15 yrs) or US. India economy is just getting to next level and it has a long way to go.

    Cost of constuction is around Rs. 1k per SFT!! Wake up!!

    Comment by Sayaji Hande — June 4, 2007 @ 12:15 pm

  233. sayaji….thats the problem…….at 2k/sft…we shud get a 1000 sft apartment for rs.20 lacs…..there are none available…unless you buy in a location with no water supply and good road.

    i was doing some number crunching….and my conclusion is that inflation in india is running so high that the export driven economy boom party is going to get over in 2-3 years…….unless usa economy again starts growing and dollar starts appreciating.

    Comment by TECHY2468 — June 4, 2007 @ 7:22 pm

  234. Sayaji…
    Where did u get the cost of construction 1000 per sqft. My guess is either from a builder or some just-out-of-college journalist who came to the figure after about an hours research. When u account for the fact that builders dont go to retail shops like us and use economies of scale the figure would be much lesser….

    Comment by __ — June 5, 2007 @ 9:27 am

  235. TECHY:

    I am new to city – HYD – I came in last year.. Was hearing about real estate buble.. I located – something called “Singpore City” it costed me Rs 1100 per SFT.. Now its Rs. 1800.. There are 2000 apartments in 100 acres!! Great buy – but at that time everyone was looking at HITech City side (and still are).. where, prices dont make sense.

    My point is – you need to look around make a search and take a decision, possibly different from current “mohalla” – and that requires some thinking and decision making. I also have a couple of apartments in NOIDA area – which were bought below Rs 1500 (not too long ago).. Things that went beyond some economic sense, I sold out.

    About cost of construction – please check out.. Its not couple of hrs perception.. Yea, there is economy of scale.. But also note,. steel prices have increased in last two months.

    Happy investing guys. Invest in India and its growth.. Not in speculation!!

    Comment by Sayaji Hande — June 5, 2007 @ 12:06 pm

  236. One can get an independent house built by a builder for abt 700-800 per sqft. 1000-1200 lwd the rate for premium construction. I wld think that wld include a profit margin for the builder of atleast 20%.

    Comment by sai aravindh — June 5, 2007 @ 3:23 pm

  237. I think we are mixing some points in this discussion board.
    1. Primary Homes/Apts/Lands for living Vs Buying RE as Investment
    2. Homes/Apts Costing 20 Lakhs.
    Recently I was in Hyderabad for 40 days and made some research on RE and these are my observations. These are almost same across the nation as entire country has increased Property values.

    1. Construction cost of materials like Cement,Wood, Steel increased a lot. A bag of Cement costing 130Rs went to become 200-220Rs,same with Steel etc.
    2.Cost of labor increased by 100% in most places
    3.Based on points 1 and 2, anybody buying any Home/Apt with reasonable land area at a reasonable place with decent rent for less than 20 Lakhs are safe if it is primary home for living.
    In case they are buying as investment, they have to look the factors mentioned in first line.
    4. Real estate speculation increased the home prices above 20 Lakhs and the increase in last 1-2 years is from 20-40, 25-45,30-65 lakhs.
    So more than 100%. If you are planning to buy a home as principal abode and you have at least 40-50% as down payment you can still buy these homes with rest of 50% as mortgage. But buying it for investment doesn’t make sense with current Interest rates. Because at 12% APR, your house price should rise 100% every 8 years and that’s a big IF.
    Even if you think Economy is so healthy and it makes them double their prices, we buying 3 homes/aprts below 20 lakhs is better idea compared to buying 1 60 lakhs property. You diversify 3 investments buying 3 homes in three diff. locatons/types.

    5. As per buying land for investment, that is always a luck until you realize it’s sale value. You have to think of land safety, land mafia, price appreciation, the real value vs hyped value due to future fab cities/tech cities and top to all you should be lucky too!!!
    What do you say guys!

    Comment by Mad4cash — June 7, 2007 @ 9:03 pm

  238. pl see this site
    surely the prices shall stabilize soon

    Comment by k v srinivaan — June 9, 2007 @ 1:39 pm

  239. You Guys are terrible think too much,

    I will give the statistics.. I am from Bangalore but stay in Dubai and There are 3 lakh people who work in IT/BPO sector in Bangalore directly or indirectly. Its increasing every year atleast by 20%. Thats huge, I can guess only 15%-20% might have their own house. Rest they are still either searching.. or waiting..

    I am not sure what is bubble burst.. somebody quoting 8000/-Rs per sq ft in HSR lyt. This is something exceptional. either the owner has gone mad or the site is exceptional location.. Take the general trend in whitefield the flat rate in one of the prominent builder was…

    October 2006 2850/-Rs per Sq ft.

    November 2006 2950/- Rs per sq ft.

    March 2007 3200/- Rs per sq ft

    Apr 2007 3300/- Rs per sq ft

    June 2007 3150/- Rs per sq ft

    It has gone down but I dont think it will reach 2950/-.. this is the date on which this topic started. So do we call this as a bubble burst.. just some 10-15% reduction from the last price.

    Even 20% crash is not a bubble burst when the RE has gone up by 180-500% from last 3 years(Depending on land or flat).

    My sugestion would be Just Buy, if the Rent to Investment ratio is above 3.5% per annum for flat. It will work out for u. if the flat cost is 30 laks, then u should get 10,500/- rent.

    The reason being:
    1. IT industry will continue to grow. Even though there are 23000 engineers coming out of karnataka engineering colleges, the salaries of Software engineers is just increasing. getting 20 lakh per annum for 10+yrs Software engineer is common. The reason being world is becoming more flat and flatter… where u work doesn’t really matter. So companies are making profit even if the salaries are just 50% less.

    2. Huge % of people in India are from have not, so they eventually should own a house. They buy it from you, when they can afford the price. The salaries in India is very low, we are still a hungry nation and we have nothing to loose. So i guess we have only upward move. So common man salaries should go up anyway..

    3. India is country of villages.. 2/3 of our people are still farmers and stay in vilage. We can not provide the social/physical infrastructre to all villages. Its very expensive to provide it to villages(Its cheaper to provide it for cities). so they have to move to cities eventually(move from farming to production). I am talking of 30 crores population moving to cities.. Just buy it. It will be useful for your grandsons..

    Comment by Pradeep — June 10, 2007 @ 12:22 am

  240. My Friend, you are not up to date at least with Whirefiled……Even people unable sell flats in Prestige Shatiniketan.I got an offer from some body for the same for Rs.2650/sq ft last week.I am trying to sell a property in Gurgaon which is in the heart of Gurgaon.The prices have gone down nat least by 20% there and there are no buyers.

    Comment by nsk — June 10, 2007 @ 10:50 am

  241. Pradeep,

    1. Bangalore is driven by IT and there is nothing else! Biotech is a pipe dream. Slowdown in IT, salray growth, etc will have an impact
    2. Indian economy in the past 50 years have grown primarily through dedevaluing indian currency.
    3. MNCs come here only for low cost. So cost advantage is going to disappear fast. That means high-paying job growth will slow down considerably.
    4. Village people who move to cities are looking to have two meals a day and NOT waiting to buy NRIs villas.
    5. there is definitely a heavy level of speculation. HSR quoted at Rs 8K/sq ft is an example. The game is going on because prices have not started going down substantially. But remember buyer strike is just beginning. So it is too early to tell all speculative RE investments are safe.


    Comment by Nathan — June 10, 2007 @ 5:06 pm

  242. Hi All,

    I am new to this site. I live in the US.

    Here in the US, since the federal reserve (central bank) started to raise interest rates, real estate prices have either stopped growing or have started to come down. Home sales have declined sharply. I think the same thing is happening in India. The reserve bank started to raise rates some time back. Mortgage rates were around 6-7% but are now running upwards of 10-11% in India. This is part of the reason why the market is cooling in India.

    And if you follow US treasury bonds, the rates on 10 year bonds, which the mortagage rates are linked to, have started to go up. If they were to keep going up, most of the liquidity, (easy money from the banks and other sources that people borrow from) could dry up. This will have implications not just for the US but also for countries like India where a lot of foreign money has poured in and has been partly responsible for the run up in real estate and share prices. Let us not forget the Asian flu of 1997 when real estate collapsed in Thailand, Malasia, Indonesia, and others. That happened because the rates in the US went up sharply, in a short time.

    Amit Marwah

    Comment by amit marwah — June 11, 2007 @ 4:29 am

  243. Dear All

    My definition for bubble is this:
    1) Even a small drop in price (by 5%) by the greedy Real estate or construction mafia
    2) The price staying stable with small fluctuations (+/- 5 to 10%) for about five years

    But, I wish the prices come down much more. As someone observed, how a common man can afford this? Even, the affordable IT guys can no longer afford. Many of the “affordable IT guys” are party to this mind-less increase. Because, the worthy of money is not fully understood by them. They are looted by the greedy Real estate or construction mafia, which the IT guys have not realized.

    If someone had fuelled this with or without knowledgeful (the IT guys) or the specultors, I wish them go to hell. I care for the common man, who just wants a roof over his head. That roof (that too an apartment roof, which looses its value beyond 10 years, and starts depreciating), cannot cost so high!

    My calculations are simple:
    Take home salary of Rs.25,000/=
    Can afford about Rs.15,000/= EMI
    For about 20 years @ 12% interest

    The cost of the house: Rs.18,00,000
    Initial payment : Rs.3,00,000
    Loan Amount: Rs.15,00,000
    Will be able to pay an EMI of Rs.16,516 @12% interest for 20 years.

    The House has to be (AT LEAST) 600 sqft (for Two Bed-rooms),
    Hence, should cost NO MORE THAN Rs.3000/sqft.
    I would call, anyone who buys beyond this rationale, contributing to RE bubble and speculation.

    With Deep feelings for the plight of common man

    Comment by Truth-speaker — June 11, 2007 @ 1:02 pm

  244. House/site/flat prices are bound to crash in certain pockets of Bangalore.While, certain places will retain/slightly appreciate.

    New entrants in to the field should be careful and should go for real estate investments only if its for utility(And are willing for correction) or only if they have some one with vision to guide.

    Comment by Abhinandan Patil — June 11, 2007 @ 3:57 pm

  245. K V Srinivaan, You are too optimistic and unrealstic.

    Comment by AHP — June 11, 2007 @ 4:11 pm

  246. Typo it should be Pradeep instead of K V Srinivaan in comment “K V Srinivaan, You are too optimistic and unrealstic”

    Comment by AHP — June 11, 2007 @ 4:16 pm

  247. who can live in 600 sq ft that too as a 2 bed room apt, what a POS..
    then again, i have seen those coop like chawls where so called millionaire mumbaikars live..

    Comment by andiron — June 11, 2007 @ 5:19 pm

  248. in london some one converted a janitor’s/cleaning storage into a apartment, total square footage was something like 200-300 sq foot, in other words one room only…because it was located in a prestigious location.

    Comment by TECHY2468 — June 11, 2007 @ 8:32 pm

  249. Pradeep,Please see the add for Prestige Shantiniketan in whitefiled.
    This guy is quoting 2800.He will come down to at least Rs.2650 easily.So it in no where near the Rs.3250 you were talking about

    Comment by nsk — June 12, 2007 @ 4:46 am

  250. NSK

    I am thinking of going to Bangalore may be after 10 years. And yes, Prestige Shantiniketan is one of the places I have in mind. After 10 years, I would have to pay a max of 2000 per sft.

    Comment by Vasudevan — June 12, 2007 @ 7:47 am

  251. One more thing I want to say based on personal experience (so many scandals) and so much reading is:

    If people are buying something like there is no tomorrow, like there won’t be anything left tomorrow so we have to buy it today, then that is the WRONG time to buy it, whatever it may be, stocks, real estate, gold. Whatever the paradigm shift may be in global economy, whatever the prospecitve growth may be, it is preceded by the speculation due to anticipation. By the time actual growth happens and it is upon us, this fervour and mania is long dead.

    Comment by Vasudevan — June 12, 2007 @ 7:53 am

  252. Its going to go up no matter what!!Mark my words

    Comment by Whatsinaname — June 15, 2007 @ 12:54 am

  253. Vasudevan: After 10 yrs, 2k per SFT – is this 2k US$? Or Indian Rupee? If you think its Indian Rupee – you are way off!! In long run, you would have REAL returns on real estate – be it at peak or low.

    Comment by Sayaji Hande — June 15, 2007 @ 5:03 pm

  254. Whatsinaname,go and grab as much land as you can..

    We shall buy it back from you when you land in trouble

    Comment by BSS — June 15, 2007 @ 6:45 pm

  255. i would not put a actual price tag of 2k/sft……..since you never know….everyone in india maybe making 50lacs/year…….and one kilo of potatoe maybe rs. 150 (inflation).

    i would rather say that the cost of a 1200 sft apartment in most good locations will not be more than 4 times average income.

    people will not pay more than 50% of take home for mortgage…..right now they are doing it because they think they are getting rich by property appreciation.

    in india people have not seen lay-offs….we dont even know what will happen if the demand in IT/call center’s go down…..i dont know anyone else making 10lacs/year.

    Comment by TECHY2468 — June 16, 2007 @ 2:05 am

  256. Whatsinaname ….Real Returns on Real Esate??……….ask some one who bought a house in southern california (particularly san diago)..

    most people in india (including my brother who has all his investment in land) dont even know what actually drives a market…….they think its going up….it will keep going up.

    just imagine the pain….if things were to fall just 10%…and not appreciate……..all those people who bought 60 lacs apartments with loan at 10%……they are working because they have to pay mortgage…nothing else…

    Comment by TECHY2468 — June 16, 2007 @ 2:10 am

  257. Whatsinaname,
    Can you please share why you think its gonna go up? I do not agree with you.

    Have you heard of the Dutch Tulips of 1800s? If not, do a simple search on google and you shall find out. The point is NO MATTER WHAT its human nature to chase an asset and drive prices up to unsustainable levels and that nature will never change. People like you (no offense meant) are so convinced that “this time things are different” that they keep on buying and chasing the asset. But finally it all ends. And often when the end comes a million reasons show up why the price levels were unsustainable. The most recent example is in the US. The real estate gurus, professionals, etc., were very certain that there is no bubble. And at that time very few reasons were available why the bubble need to burst. But now that it has burst, all sorts of reasons surfaced.

    Now, imagine what happens if the US economy slows down (which it seems to be doing). Based on my understanding by 2008 beginning, it would slow down considerably to affect the economy in India. Then suddenly, the mood will change, investors will become cautious, foreign investors might pull out, stocks might go down, etc. We yet do not know the level of speculation in India. But my guess is that its much more that what is apparent right now. These speculators might dump the properties and run. As I said, until this happens most Indians will not believe that this can happen. But yet, when it happens no one will be much surprised. And after 10-15 years when the real estate booms starts again, people would have forgotten all about the last one.

    Comment by Prashant Bhagat — June 16, 2007 @ 4:01 am


    It seems that the correction has already started. There are articles here which are reporting demand going down and prices slowly correcting. Of course, the developers believed that the slump is temporary and that the demand will pick up again during may-june which is a buying season. I don’t think the demand has gone up. Incidentally the developers here in US also used to say that.

    Now we need to wait and watch the drama. Unfortunately, the real estate bubbles burst very slowly. So the prices may take their own sweet time to do down – atleast 2-3 years. We need to wait and watch. Once the downward trend starts its going to continue for a long time. Meanwhile, along the way, many arguments will be presented that the correction is over and that its a good opportunity to buy. Many new buyes will believe this argument and buy. But the downward trend will continue.

    Comment by Prashant Bhagat — June 16, 2007 @ 12:52 pm

  259. Ek aadmi kuch keh raha hai to doosra kuch aur. Sahee-sahee koyee nahin bolta.
    Theek-theek batao ki ye bulbula hai ya kuch aur.

    Comment by ChinTatur — June 16, 2007 @ 1:37 pm

  260. Hare
    ye tho paise walon ke baath hai! Hame samaj me nahi aayegaa.
    We ( the lower middle class – majority)have to think about tomorrow’s ROTI, KAPTA and then only MAKKAN. Now a days, we don’t dream or think about it.
    Jai hindustan.

    Comment by Ramesh — June 16, 2007 @ 8:08 pm

  261. [...] Comment on Is There A Bubble In Indian Real Estate? by Prashant BhagatNow, imagine what happens if the US economy slows down (which it seems to be doing). Based on my understanding by 2008 beginning, it would slow down considerably to affect the economy in India. Then suddenly, the mood will change, … [...]

    Pingback by Your Guide To Cash And Happiness » Blog Archive » Conference to explore arts economy — June 16, 2007 @ 8:34 pm

  262. I live in the southern United States (Austin, Texas). You have nice houses, yes houses, on 1/2 acre of land available for $120,000 = Rs. 48 lakhs. Plus one does not have to worry about infrastructure like power, water, roads, traffic, safety, and more. What is even more startling is that these things are more expensive in India! Everything else from Cars, TVs and electronics, Computers, phone charges (unlimited local calls for $20, unlimited nationwide for $40), petrol, you name it, it is cheaper here. The average income here in Austin is $36,000. Can someone tell me if the average income is Rs. 15 lakhs in Bangalore?
    Also, since things are more expensive in India, you need more salary there, maybe 30% higher.

    The only thing which is expensive here is medical insurance, which can be $400 per month for a couple+1 child. But for people who are under 50, the USA is the best place to be compared to India. There is very little unemployment here, and very little crowding. Homes and public areas are very spacious and uncrowded and quiet. I think India is optimized for poor people, who are happy living in a chawl in very crowded conditions and who do not need modern lifestyle like having a TV/phone/PC/car etc. All Indians who can should come to the USA and see how things are here. Then they will stop paying Rs. 60 lakhs, to live in a cramped apartment with little open space, driving on crowded dangerous noisy streets in Bangalore.

    I used to think I would come back to India after saving some money, but I have dropped all those plans. I just cannot see how I can afford to live in India. It is ironic that a person from a “rich country” cannot afford to live in a “poor country”.

    Comment by Observer — June 16, 2007 @ 8:54 pm

  263. I am living in the US for the past 7 years. I would not compare US with India. Though US and India are democracies there are lot of differences…. US is 3 times larger than India and 4 times lesser in population and US is found in the 15th century having vast pool of resources and people that occupied the country (US) were the inventor and had vision and resources to develop the country (US increased its population on the need to have) on the other hand India has a history back in 10000 BC and population was grown when there is no need for such vast majority of people. In India roads (majority) were developed for bullock-carts and for people to walk. On the other hand in US majority of the roads were developed for vehicles. India is slowly turning into a modern economy (the problems of poverty, congested places of living and other infrastructure problems cannot be completely solved in 15 years of India’s liberal economy – It may happen in a Communist China). There is certain hype in real estate market in India (generally prices in a democracy are not controlled they are driven by demand and supply and demand is influenced by real need and most of the time by sentiment when it comes to stocks and RE). The right thing to control prices in India is to develop roads, power, water…. beyond cities (again this does not happen in short-terms). I would count on the progress made (India) not by making unreasonable comparisons. The prices in US for agriculture land are as low as $100 per acre (good location and with water). I do not think in India agriculture land is available at that low prices… so is the case for RE… The current RE prices in India have reached (in some locations) a level where they may not sustain such prices in the long run…

    Comment by Raj S — June 17, 2007 @ 5:11 am

  264. It is unfortunate that rich countries have plenty of poor people and it is fortunate that developing countries have plenty of rich people and expensive places not affordable by Tom, Dick and Harry from rich countries…..

    Comment by Raj S — June 17, 2007 @ 6:57 am

  265. Unfortunately I *do* have to make a comparison between the US and India since I am from India and need to decide whether to return to India or stay in the US. While I do not doubt that slowly the Indian government is adopting a balanced set of policies instead of pro-poor policies, which led to an explosion in the number of poor people, that is somewhat irrelevant. The important thing is, can I afford to live in India with these high costs and a lower salary, and the answer is clearly no, at least not for a few years. Unless housing and infrastructure costs in India come down by a factor of 3 compared to the US, or I can get a salary in India 30% higher than what I get in the US, I have been effectively priced out of India. It is a truly ironic situation. I used to think America was a rich country and India was a poor country. I have been proven wrong.

    Comment by Observer — June 17, 2007 @ 7:53 am

  266. It is unfortunate that rich countries have plenty of poor people and it is fortunate that developing countries have plenty of rich people and expensive places not affordable by Tom, Dick and Harry from rich countries…..

    I agree. Imagine if 300 million Americans went to live in India because it was cheaper! Already India is overflowing with poor people, no point adding millions more. So maybe these high prices are a deterrent to prevent people from coming to India and overcrowding it even more, and encouraging as many people to migrate from India as possible. I think I have probably the best of both worlds, having grown up in a rich culture of India, and now able to live a decent lifestyle in USA.

    Comment by Observer — June 17, 2007 @ 8:08 am

  267. Everybody is talking as if he wants to tell others ‘Dekho, I am living in US for so many years.’ Nobody is talking abut the realstate’s future. I think nobody is having an idea about it. That’s why this monologue is there.

    Shame on you guys.

    ChinTatur (man worried about overpriced RE)

    Comment by ChinTatur — June 18, 2007 @ 11:04 am

  268. Talking about Bangalore,fresh supply is coming at Bidadi and new park is proposed at Mysore-Bidadi road arc.

    This will definitely lessen the burden of land parcel requirements else-where.More over residential houses are planned in the new parks being set-up.

    So invest carefully as far as new investments are concerned !

    Comment by Abhinandan Patil — June 18, 2007 @ 2:49 pm

  269. ChinTatur

    The intension is not to tell about living in US for number of years…. many responses above are comparing US with India (I meant to express that it is not the right comparison….. there are differences in parameters) any way appreciate your concern for keeping this discussion focused on RE.

    Comment by Real — June 18, 2007 @ 5:05 pm

  270. Has anybody got any hard data on number of houses sold in this season (April-May) of 2007 as compared to the number in same period in 2006? Data on last ten deals in a particular locality? Data… any data at all?!! The RE market in India is so unorganized and unprofessional, I wonder how people who invest in RE in India do so on the basis of mere “perceptions”, mania or herd mentality. Compare with these same people who would do a lot of research before they invested even 1/10th of these amounts in stocks & bonds. I wonder how the same set of people can be “investors” in both places with very different behaviour. And to think most of these are “professionals”. Perhaps all of them believe subconsciously that “RE prices never go down, only up” (Even today, when apartment prices in Worli, a part of Mumbai are higher than those in Manhattan!).

    Comment by Mandar — June 18, 2007 @ 8:40 pm

  271. ChinTatur,

    I apologize for deviating from the topic. However, in a globalizing world, one must think about the long term future of investments and real estate. The correct questions to ask is the potential growth of the local income to local prices of investments and real estate. Aspirations and lifestyles are becoming more global with every year because of the spread of the internet, telecommunitations, TV and magazines. Can someone seriously argue that over the next 20 years (the lifetime of a typical housing loan), that there will be less of an effect of globalization?

    Globally, the interest rates and valuations are going to be coming closer. Normally, people are asked to allocate anywhere between 25-35% of their monthly income for a mortgage payment. Assuming that the average income in Bangalore for IT folks is about 8 lakhs, a maximum of 3 lakhs per year should be budgeted. Which implies a house/apt approximately worth 22 lakhs. Unless people expect their salaries to continue rising substantially every year for the next 20 years, it would be foolhardy to stretch and pay something like 50 lakhs for the same apt.

    Given that the US dollar is depreciating, the likelihood of IT salaries in India rising continuously are very doubtful. Also, given the higher infrastructure costs in India because of systemic inefficiencies (power, water etc), people are getting a higher priced product at a lower quality. This cannot be sustained, people are traveling and are going to become more aware, not less. So either the infrastructure is going to have to come up to global standards within 20 years, or prices have to come down. Given the populist bent of Indian politics (free power, free water etc), who is going to invest in infrastructure at that level? As for being an investment driven market, as Mr. Mandar put it very succinctly, if someone has money to invest, are they going to invest it in Khargar, where one is not certain if the land has been encroached upon, or the buildings are earthquake/soil sag proof, or constructed according to approved plan? Or are they going to invest in USA in land/houses, which is a very transparent process. Even if one invests in land, would someone prefer to invest in land in India where one is not sure if the Govt is going to seize the land at below-market rates for some project, or if the land is going to be encroached upon by local political goons or by neighboring developers who will pay a bribe to the local district office to change the registered plans to show they now own a part of your land? People are going to invest where property rights are secure.

    Comment by Observer — June 18, 2007 @ 9:32 pm

  272. Observer…i disagree with you……..people invest where they see maximum growth with acceptable risk (current Foreign Investors in mumbai stock market).

    and you may be surprised that many indians left usa even after getting US citizenship….and bought houses for Rs. 1 crore. In other words when people have money…and they are not savvy investors……they try to invest in comforts (nice home and nice car).

    I am still surprised as to who is buying all those apartments priced 40 lacs and more……because to even get that kind of loan….you have to be making atleast 15 lacs/annum.

    40 lacs is just where good apartments are starting in tier-I cities bangalore..

    i feel sorry for the real buyer who maybe taking loan to pay 50 lacs for a apartment….he maybe the one left holding the bag….and i hope he wont lose his job if IT goes down due to reasons like protectionist measures or sharp devaluation of dollar..

    Comment by TECHY2468 — June 19, 2007 @ 1:40 am

  273. Wah..Wah TECHY2468, tune to meri munh ki baat cheen Lee!!!!
    Lage raho Techi Bhai…

    Comment by ChinTatur — June 19, 2007 @ 9:21 am

  274. Keep the language of communication as English.

    This is not the exclusive portal of Biharis,MPs,UPs

    Comment by Moderator — June 19, 2007 @ 1:42 pm

  275. Hey Guys..

    Frankly – many of you who missed the early ride, are day-dreaming of crash..

    RE wont really crash!! BTW – many of the high rates are due to surge by NRI purchases as well!! Basis for RE rate is supply in long run, has always and would be limited. Base prices of apartments wont go down further than 2k at t’day rates. So, jump in, if you can, instead of cribbing (how US is great et al – then why are looking at India for investment?) and invest for long term.. for self and your country.

    Comment by Sayaji Hande — June 19, 2007 @ 4:01 pm

  276. As far as keeping the medium of communication as English, I don’t agree with Moderator.
    A blog cann’t be confined within a language. Afterall we are expressing our views regarding a topic and not a laguage. So how does it matter if we add some humour in any language?

    He has written the line ‘Biharis,MPs,UPs’ in a very sarcastic way.
    I am sure that he must also be belonging to either of these states in one way or other.

    Either he is not an Indian or must be an ‘Agrez ki Aulad’.

    Kaho kaisi kahee Moderator bhai?

    ChintaTur (Now worried about Moderator rather RE)

    Comment by ChintaTur — June 19, 2007 @ 6:40 pm

  277. sayaji….supply??…do you think we dont have enough land……not its not true….if the the government can remove a bit of redtape… can see multistoried townships with 10k housing units coming all over the place…

    so supply is not the issue…..

    here is one more piece of data…..a house in kanakapura road, bangalore. is fetching a rent of rs.4500, but the cost of house is 30 lacs.

    you need to give me pretty good explanation for the above mismatch.

    so you are saying that since india is like japan….made up of small inhabitable islands… day people are just going to pay 80% of their salary fo real estate because housing is in short supply..

    do you know what is going to happen the day….RE is not going to appreciate (can you imagine how a person making 12 lacs/year, paying 60% of his take home towards mortgage, and not able to afford a good lifestyle will feel, and that feeling will make others just rent for a while…remember rents will go up for a while to catchup with RE prices)…….and if i am not wrong we are very much near the phase of stagnant appreciation…..

    just say thanks to the FM that they have put restriction on supply (to save export industry by avoiding rupee appreciation by limiting dollar inflow) by limiting foreign funding of RE.

    wait for 4 years……we will have plenty to choose since millions of housing units are getting constructed right now….for which actual buyers may not be around at that time..

    Comment by TECHY2468 — June 19, 2007 @ 7:04 pm

  278. Majority of the bloggers here are of the opinion that there will be huge crash going to happen in Indian RE. While I do agree that the prices are unsustainable at these levels, I don’t expect a huge crash either. While some localities which have appreciated multifold in recent years may correct to some extent, but there will be definitely new localities coming up with scope for appreciation.One main factor driving the prices up is the mismatch of demand and supply.Even now the home ownership in India is very very less compared to developed countries and every year thousands of prospective buyers( IT/ITES employees) moving to metros which will sustain the demand for quality housing.Unless the government attempts to spread this development to other parts of the state other than the major metros, there is no scope for major corrections in RE. At best it may correct 10-15% and stablize at that level.The moment it comes down a little, there are so many of us waiting in the sidelines to jump in and buy a property.I don’t anticipate a scenario wherein you have millions of houses available for cheap prices

    Comment by Japee — June 20, 2007 @ 1:47 am

  279. For investors like Sayaji it is of course important to have prices keep going up, but the country as a whole will suffer because of this. TCS recently announced they are hiring 1000 people in USA, and another 5000 people in Mexico because of soaring wage costs (influenced by RE prices, and rupee appreciation). Please check the following link:

    These “investors” are going to drive business away from India. I was actually planning to buy a home to settle in India, and I have put off those plans because I do not want to end up being the greater fool. Even the stock market in India is overvalued with fairy tale valuations, maybe there is another Harshad Mehta type of “investor” manipulation also. I am planning to keep all my dollars in US mutual funds and CDs and wait until things make sense before putting the money to use in India.

    I have also told my friends and relatives about this, and asked them to spread the news at local NRI gatherings throughout the USA. One of my cousins also was suspicious about these prices, and has backed out of a purchase in India. Of course, people like Sayaji also perform a useful function. A fool and his money must be separated, and if someone is foolish enough to pay that kind of money for a vastly lower quality housing, then they do not deserve to keep the money. Buyer beware.

    Comment by Observer — June 20, 2007 @ 5:05 am

  280. I definitely think “observer’s” post deserve some comments

    1. Nothing wrong with Indian businesses going out and establishing in Maxico and other places.. The expected india investment outflow is likely to be $35B this year alone!! And its good sign.
    2. The economic growth in India is for real.

    – Please don’t go too personalized with attacks!! All I am saying is RE is unlikely to crash – specifically apartment going down Rs 2k.
    – Returns in terms of rent / yield – needs some study. When expected appreciation drops, yield with inch up. Highest yield in India is in Mumbai.

    Good luck with your wishes of RE crash.. But I hope you find investment options, India has a long way to go – its booming economy, unlike to China, great and stable democracy (just see how different people / state are together for so many years in one country, compare with Europe).

    Comment by Sayaji Hande — June 20, 2007 @ 9:16 am

    In suburbs such as Andheri, Goregaon and Malad builders often offer a 10 to 15 per cent discount on bulk deals. Those discounts could reach 30 or 40 per cent if it will them clinch the deal.

    “A builder might quote Rs 10,000 per square foot. But if you sit across the table with money in hand, he will reduce his price by 30 to 40 per cent.” says Bastvi Estates Agent, Rashid Bastvi

    Comment by sai aravindh — June 20, 2007 @ 11:55 am

  282. Guys, please maintain the spirit of this blog. You can fight somewhere else. Please…

    Comment by Peacelover — June 20, 2007 @ 6:16 pm

  283. Reply to Sayaji:

    1. The RE prices have to be based on the local income. If hundreds of thousands of IT/ITES employees are going to be moving to the cities, if their wages are going to be very high on a dollar basis, companies are going to move out, either to Tier-III cities, or out to other countries. I had posted an example of how TCS is moving out to Mexico and USA. And IT/ITES employees are among the highest paid employees in the country. If their wage increases slow down, or employment stagnates, who is going to pay 50 lakhs for these apartments?

    2. Regarding Indian businesses going abroad, yes in general that is a good sign for companies like Tata Steel etc. This allows them to get access to technologies through acquisitions and new markets. However, for companies like TCS going abroad, this is motivated by wage/RE/exchange rate issues. Quality IT/ITES office space in India is becoming expensive. In that context, companies investing or hiring outside of India is not a good sign. Even if the local economy is projected to add jobs in other categories, the salaries are going to be far less than 12 lakhs/year on average.

    3. Once private sector reservations are also introduced, with 50% of employees hired based on caste rather than skills or qualifications, profits for IT/ITES are going to come down, with other morale problems among remaining employees. For those who think this cannot happen, witness the recent Gurjar/Meena violence. More people will get themselves added to SC/ST/OBC/BC/MBC list and agitate for private sector reservations. Foreign companies are going to pull out, and salaries will come down as companies profit margins come down, and stock valuations come down.

    4. NRIs, particularly in developed countries are not all fools. There are many like me who possess at least some intelligence. They will be willing to pay an appropriate cost for properties in India after taking into account local conditions. To suggest they would be happy paying developed country prices for property in India, with its relatively poor infrastructure, is absurd. Of course, if some NRIs do believe that makes sense then I can also understand if “investors” can strip them of their money. Maybe in a philosophical sense, idiots like those do not deserve the money, and the “investors” are doing a valuable job by teaching those idiots a lesson.

    I also believe there is not going to be a big crash. The likely scenario would be a gradual price decline or stagnation as inflation catches up. Investors who have brought property are not going to sell for a loss, they are just going to hold on to the property as long as they have not leveraged themselves. And similarly NRIs like me who find these valuations absurd for paying developed country prices in a developing country, are going to wait till the relative valuations make sense. Developers will also stop building properties for “investment”, and finally the market will slowly come back to normal. Until then it is a waiting game.

    Comment by Observer — June 20, 2007 @ 7:20 pm

  284. Observer….there is some bad new for you….since you are in usa….dollar is depreciating…….usa economy is uncertain (with more data on downside than upside).

    so you keeping your money in us dollar or us mutual fund is not a good investment…..i have kept 70% of my saving in indian banks to hedge against falling dollar..

    i dont know about crash…….but CURRENT PRICES ARE UNSUSTAINABLE………i am having a hard time thinking about salaried people paying 50 lacs for apartment……by taking loan… must be a hard life…

    and there are hundred variables which are undecided right now…….i think the next 18 months is the most crucial time in global economy…..things are going to play out and we may have a clear picture of future trend.

    in the next 4-5 months we need to see the wages for IT/ITES…………because they are going to stagnant or go down……no more 15% raise every year…..and that is going to be a big factor with respect to spending by people…

    Comment by TECHY2468 — June 20, 2007 @ 8:51 pm

  285. Looks like lot of exuberance is there in the market.Global indicators indicate that the RE price is one of the major criteria for choosing the destination in India for the MNCs.RE prices are unreasonable in major tier I city.Inaddition,there is thrust from the government to develop the satellite cities.

    RE prices are mostly driven by the speculations/psychology,since there is no mathematical formula for arriving at price per sqft in any area.This is in contrast to other consumer items,lets say a car price.

    All in all,with all the study/research no can for sure predict the price of land in certain micro-pocket of certain city after certain period.

    So my philosophy would be “Buy if its for utility and if there is pressing need,else wait”.

    Comment by AHP — June 21, 2007 @ 12:47 pm

  286. Observer & Others…
    1. Do you know – lotsa investments are happening from NRIs.. Last year I purchased one apartment in HYD – went for registration and saw one IT wiz kids, who had purchased three!!
    2. I never said NRI’s don’t understand.. Most are among selected a few..

    Having said.. Lets keep watching.. I wont invest any more in RE, unless I see something exciting and costs

    Comment by Sayaji Hande — June 21, 2007 @ 6:01 pm

  287. As far as rupee-dollar story is concerned, general consensus seems to be that rupee is appreciating and dollar is falling. Hence, some will move majority of their money to India. Others who don’t buy India story want to keep their money in American banks.

    Aren’t there other ways of hedging against the dollar? How about spreading your money in multiple currencies. Check out a that allows you to buy CDs in various currencies. Or how about investing in non-american stocks. ETFs on companies from Singapore (EWS), Sweden (EWD), Switzerland (EWL), Germany (EWG), Australia (EWA), emerging markets like India, Turkey have done exceptionally well as dollar has gone down.

    My personal experience in investing has been that when everyone is certain about a future event, that thing seldom happens. else we’d all be billionaires :) that thing happened with oil prices and lots of investors lost their shirts. so don’t be shocked if rupee falls dramatically against the dollar..

    for RE prices, i agree they don’t make any sense at all. they didn’t make any sense in silicon valley or manhattan as well but prices never crashed there. i think in economic downturn, number of buyers who can afford at current prices goes down but that doesn’t affect the overall market. most of companies went down in dot com bubble but few companies like apple, google, ebay continued to create wealth and their employees kept paying top $$$ and hence no fall in prices. same thing can happen in india. not all companies will go down. concept of offshoring has been invented so it won’t die anytime soon. good companies will create more wealth and hence potential buyers keeping up the prices. but hey, this is india. there’s no data or logic or transparency here…so anything can happen here.

    Comment by ashutosh — June 24, 2007 @ 4:14 pm

  288. ashutosh….i agree that silicon valley is still not seeing a crash….but i wont bet on it….remember home prices have almost doubled in the last 5 years…..particularly when wages were not increasing and IT was bust…..reason is: low interest rate.

    now that low interest rate is gone, i know people who have borrowed $600-$700k, paying around $4500 in interest every month…..they do make a 150-200k salary, but whats the point….their home prices have started going down….(the only reason people pay a huge money is when they have ton of money doing nothing……..or when prices are appreciating, otherwise most people will keep renting particularly in usa).

    prices have been badly going down….i wont be surprised if they go down by 30-40% in california….in case there is a recession in usa…

    i am not too worried about falling USD….it wont affect rupee much….neither yuan….since these two countries manipulate to keep the currency constant so that export is not affected.

    the only reason rupee went up 10% is because IT guys were getting mad…wages were going thru roof….causing inflation in whole of economy and hurting the common man since only 1% of population is benefitting from IT/ITES/finance…every other sector there is not that much money…

    if the rupee go up another 5%….IT guys will be on their way south…..india will not remain competitive………or wages will go down… either case real estate does not have support from actual buyers…

    one more thing….NRI’s coming back from india…will not be so keen since most got some movement in their green card process…

    of course with falling usd….we are keeping money in india…but if a 100% safe bank deposit pays 9.5% interest…..who wants to invest anywhere taking risk..

    thanks for the tip about australia….i was looking for such instrument to spreak currency risk…

    Comment by TECHY2468 — June 25, 2007 @ 2:17 am

  289. TECHY – just few comments on your post.

    First, rupee appreciated by 10% not because of IT salaries but because of excess supply of dollars in india via FIIs investing in stock market and real estate, private equity, and NRI remittances. I agree Indian govt won’t let it rise above Rs.39 to a dollar. I am myself curious to know – can FIIs pull out all of their money i.e. can they book profits and repatriate without any conditions. if that’s the case, i see a huge risk for indian stock market.

    second, you get 9.5% or 10% these days on domestic rupee accounts and you cannot convert it back to dollars. interest rate for NRE accounts is same as in US – around 5%.

    lastly, on california – it’ll always be a preferred place to live as it doesnt get cold and depressing in winters like north and east US or hot and humid like south and southwest. schools like Stanford, Berkley, UCLA, USC, and several more will continue to churn out new ideas that will improve this world, hollywood is not going to lose it’s excitement or business, california will always attract liberal minded people. have you seen apple stock lately! napa valley will continue to produce good wine. yeah there are earthquakes every now and then but they cannot shake the demand for a piece of california. did you know how many koreans (from korea) are buying RE in Los Angeles. Indian govt has allowed investing 50 lakhs a year in RE abroad so don’t be surprised if your buddies from India start picking up property in CA. I think CA will continue to command a premium..


    Comment by ashutosh — June 25, 2007 @ 11:30 am

  290. >
    the short answer is.. YES. But the risk may not be as big as imagine. The reason is – the moment the FIIs start selling big, the rupee wld start crashing – and then they wld be hit on both fronts. for the stock market doesnt have sufficient depth to bear a FII pullout with equanimity.

    Comment by sai aravindh — June 25, 2007 @ 1:32 pm

  291. if rupee starts to crash, won’t it be golden news for IT/ITES firms and other exporters who earn in dollars. their stocks will at least stabilize if not shoot up in this scenario. then FIIs will return and story will continue. aren’t these market forces mind boggling :)

    Comment by ashutosh — June 25, 2007 @ 3:25 pm

  292. ashutosh…sorry to say but sounds like you have investment in RE in california (you sound biased).

    california is great place….but not great enough that median price of home is atleast 6-8 times median salary…..every other big city it is around 3-4 times.

    that is simply ridiculous….paying more than 60% of your income for housing……you make a ton of money but for the mortgage banker.

    second FII is one of the reason for pressure on rupee to appreciate, but as long as RBI wants it can fix the exchange rate.

    below is my understanding of how it works, correct me if i am wrong:

    1. FII wants to invest in india….lets say they want to buy stocks…they go to a broker….and transfer him dollars.
    2. the broker will send that dollar to RBI to be converted to rupee
    3. thats how RBI can always keep sticking to a particular price.

    and i stick to my opinion that rupee was appreciated to stem the rampant wage rise in IT/ITES…..because they were causing inflation all around.

    and if they are still making profits, such that wages keep rising…..i wont be surprised if rupee is let to rise again…….IT/ITES has had its day….tax holiday and exchange rate benefits.

    if rupee was to let appreciated as free market….it would be priced Rs. 25 to a dollar.

    same tactic is used by china. (they invest all the dollars they receive in us bond/treasury…… other words they lend back all the money they just received)

    there are some sectors which are not so cash rich as IT/ITES, and thats why rupee has been left to hover around 40.

    one more reason for the pressure on rupee, AUD, NZD etc…. carry trade from japan/swiss/europe.

    Comment by TECHY2468 — June 25, 2007 @ 6:40 pm

  293. How do you conclude in a free market $1 = Rs 25? If this were to occur, Indian economy/Indian RE will suffer. The textile industry is already suffering because their margins are pretty low. the infosys’ and Wipro’s can hold or perhaps flourish if the rate of change in Rs appreciation is reasonable. A 40-50% appreciation will very logically affect investment/job growth/economic growth. the only benefit will be Indians can go on cruises with a 50% special discount!

    Comment by Nathan — June 25, 2007 @ 8:38 pm

  294. Response to Techy:
    Stating that the ruppee was appreciated to contain the wages of IT/ITES is piece of your imagination. Either this comes out of the person who does not understand what is happening currently in Indiaor be you are living outside for long time. You yourself quoted above that IT/ITES constitute only 1% of population.How can this small group impact the whole economy to the extent that the government thinks of appreciating the rupee is a big WONDER? The real reason for this whole inflation is due to the huge FII inflow in RE and for your information Finance ministry is devising ways and means to contain this FII inflow in RE. Indian government has already put some restrictions on it. Also some of this inflow come from NRIs who have rushed to gain a piece in this gold rush in Indian RE market( I know one of my friends living in US who took bank load there and invested in Indian RE.I understand your view that India RE market is spiralling and this madness can not continue, but to attribute everything towards IT/ITES amounts to oversimplying the issue without understanding the macro changes happening in the whole economy.

    Comment by Japee — June 26, 2007 @ 6:37 am

  295. Japee, even though IT constitutes 1% of the population, the money that comes from IT is very significant. Infact, most NRIs investing in India are in IT. Large part of people buying Rs.50 lakh apartment come from IT. So I agree with TECHY.

    Comment by Bubbledreamer — June 26, 2007 @ 7:11 am

  296. Impact of IT on Indian Economy –

    Its grossly over stated.. IT exports are probably close to $10B+.. # of IT employess till couple of years ago was

    Comment by Sayaji Hande — June 26, 2007 @ 10:27 am

  297. Less than Indian Railways (some how the text got missed)

    Comment by Sayaji Hande — June 26, 2007 @ 5:16 pm

  298. Hande/Others, Coming back to RE,the IT Engineers number is more than sufficient to create virtual shortage of RE(Specifically apartments) in many tier-I cities.

    Till now,in Bangalore,the fresh supply of apartments(Specifically in the East part of Bangalore)were getting exhausted in no time mostly due to software engineers(With the help of Banks)

    I am software engineer my self.In many group discussions, my colleagues/people whom I know in this industry, used to acknowledge that the prices are unrealistic but some how used to end up as scape goats while taking that utmost important step(Some because of pressing needs and some due to greed).

    All in all,now genuine buyers are showing some resistance to the unrealistic prices and which is commendable.

    My heart goes for those who end up committing their life time savings to the RE sharks( Who keep jacking up the apartment prices with no logic every month/fortnight).

    For all those people in IT, who are committing their future savings, please be informed that the future earings are NOT always assured(Political/Economical/International reasons may turn the table in no time).

    Comment by AHP — June 26, 2007 @ 6:36 pm

  299. japee….i have done enough research….can you present some facts to support your argument.

    can you give an example of sectors where average people are earning more than rs.8lacs/year as salary……..its only in IT.

    i can say that salaries in other sectors have improved…but not anwhere near IT….

    the whole RE boom/bubble as been attributed to IT/ITES………so either they are wrong or you are wrong.

    coming back to apprciation of rupee….can you explain how come the rupee was let to appreciate only 15% in the last 5 years, while other currencies have appreciated almost 35-40% ??

    i firmly beleive that RBI has total control over rupee…..and only reason they will let it appreciate is to improve imports……and limit exports…

    yes textiles has been badly affected because they cannot compete with super cheap chinese…..but the government may be giving some kind of subsidy to them (or they are just the price to pay)

    yes government is controlling Foreign investment into real estate but do you know that it cannot really control much….since money is going to flow through other channels…

    my opinion is that it is using the pretex of overheating Real Estate as a reason to control foreign investment, why??……..too much foreign investment is going to cause bubble in every other sector……….and those guys just flee at the drop of the hat whenver they get scared….and we have enough liquidity in india…..we dont need any more investment (except for long term locked investment).

    and yes i repeat IT/ITES are getting out of hand in terms of wages………they are asking way too much……and they are dumping that earning into assets, leading to the current bubble in RE.

    Comment by TECHY2468 — June 26, 2007 @ 10:53 pm

  300. nathan:

    1$=Rs.25….would have happened long back if it was really a free market…

    there are many methods to calculate exchange rate….but i am using a simple one….Purchasing power parity..

    Rs. 40 can buy how much goods/service in india compared to usa/europe/developed countries.

    but we cannot use an actual scale…..except for real estate….actual conversion will yield 1$=Rs.15

    yes….ruppe is almost 3 times undervalued as per PPP.

    but dont worry, if the current inflation continues in india (almost 10%/year, if i include cost of shelter it is almost 20% (based on the fact that in 6-7 years you can expect your house rent to double)… another 15 years…..PPP will match the current exchange rate…unless india keeps increasing the exchange rate to match the inflation mismatch between india and developed countries.

    Comment by TECHY2468 — June 26, 2007 @ 11:00 pm

  301. i am surprised that people do not know…the actual reason for RE price increase.

    the real buyers are only 20%… of them just book apartments by paying booking fee (i am guessing 5% to 10%) within couple of months they find buyer willing to pay 20-30% more for the same apartments…….and these buyers are also specualtors/investors.

    finally when the end user buys its almost double( i still dont know how people are paying 60 lacs for a house in bangalore, to get 50 lacs loan, household income has to be alteast 15 lacs.)…

    the above scenario maybe wrong….only time will tell (for this panzi scheme end, we have to see a good slowdown in sales).

    Comment by TECHY2468 — June 26, 2007 @ 11:04 pm

  302. For a more detailed look at the kind of flipping that TECHY248 refers to, please check out the real estate section on craigslist:

    You can see many people booking properties in Prestige ShantiNiketan etc on good floors (top floors are always in demand, and “investors” know it). And these guys are trying to sell now at some inflated cost to some other idiot who can pay 50 lakhs. Watch out for “transfer fee” in the ads, or ask the buyer about this “transfer fee”.

    I see small villas being advertised by these flippers for almost 1.6 crores! That is $400K, which is similar to house prices in a nice suburb of Seattle! Now compare the roads, traffic, pollution, safety, power, water, telecommunications etc in Bangalore and Seattle, and imagine who will want to pay those extraordinarily inflated prices in Bangalore!

    Comment by Observer — June 27, 2007 @ 2:07 am

  303. observer….i agree that the price is outrageous, but dont try to compare usa to india in terms of quality of life.

    just try to compare based on affordability (income to house price)

    indian infrastructure can never match a developed country, reason too much population…..and politicians are too unaccountable.

    i admit that i dream of indian cities becoming like singapore…..concrete everywhere…..but properly planned….and elevated highways all around.

    another thing…usa appears to be like a upper middle aged….growing old person…………india is young and vibrant though they are slightly foolhardy…..

    its a wait and watch for us economy….i cant imagine where the housing will go if we end up in recession….and the only strength, jobs start vanishing……we may be able to buy a good house for $200k….too bad we may not be able to afford it since we will be laid off and no one will finance it.

    i am also waiting and watching things unfold in india….i hope they get the inflation in control…..otherwise naxalites may not have any difficulty in getting new recruits.

    Comment by TECHY2468 — June 27, 2007 @ 10:32 am

  304. The first warning signs of the bursting housing bubble
    First, remember that things get overheated when the general public begins to spend money on investment vehicles with the idea of quickly doubling their money. When enough people get into speculation, it is a sure sign of a bubble. When people aren’t buying a house for a place to live or as a long-term investment vehicle to rent out, you know the market is overheated. When you hear a lot of people talking about “making money on their house”, then you know there’s a big bubble. So, that’s one interesting sign. It’s not very scientific, but there are far more scientific signs to be seen.

    Read full story at:

    and please passit on to Near & dear one , press and for Public intrest

    Comment by Bhatt — June 29, 2007 @ 12:00 pm

  305. Thanks Bhat for the great Article.

    This kind of Article restore the Sanity in RE and help the people from falling into the trap.

    Prevention is better is than cure.Lets help atleast some families by giving the information much needed.

    Comment by AHP — June 29, 2007 @ 2:31 pm

  306. Breaking News!
    See the report below on

    It is about Bear Stearns, the big Wall Street firm which has lot of exposure to hedge funds dabbling in subprime mortgages in US. Now that the subprime bubble has burst all hedge funds which have large exposures to them (even indirectly) are in trouble. Read the article carefully for the hidden gems. It says that
    ” The broader housing market also presents a potential threat. In Maricopa County, Ariz., which includes Phoenix, houses are entering foreclosure at a rate of more than 50 a day, according to, up 60% from last year, as recent buyers are hit by high payments and falling equity. The faster foreclosures rise, the more it may become apparent that the loans held by the CDOs are in trouble and the greater the risk of CDO downgrades.”
    This means that the nutty RE “investors” (they should be called gamblers actually) will drag down not just the RE prices or go bankrupt themselves but will drag down many so called “respected, good old” investment banks and brokerage houses like Bear Stearns alongwith them underwater which could have wider ripple effects all over.

    Comment by Sane Voice — June 29, 2007 @ 5:10 pm

  307. Bhatt, very interesting article. I have been saying this for a while now. NRIs and even upper middle class Indians are buying apartments left and right for 50 lakhs when they can rent it out for only Rs.15000 or Rs.20000 a month. EMI on 40 lakhs (assuming u r paying 20% down) would come close to 50 thousand rupees at current interest rate level. So people would have to pay approx Rs.30000 a month more from their pocket just keep their property. This is unsustainable. Moreover apartment value depreciates as it gets older.

    Comment by Peacelover — June 29, 2007 @ 6:31 pm

  308. Peacelover…you are right……and i am baffled and unable to find the real buyers forking out 50-60 lacs for apartments..

    can they be NRI’s returning home with their $200-300k savings?? can they be so dumb or they are very naive and they dont caculate too much about return on investment when it comes to buying a primary residence.

    they just want a good location and since they can afford it, they gladly pay for it.

    even then they cannot be more than 10% of the market (10k per year)…….but as far as i know…..10% is enough to sustain a speculative market……..because in india not many people buy and sell property on a frequent basis…..most people stay put for their life time…..

    i wish we can do some caculations….and statastical analysis….but there is hardly any data about indian real estate…

    but one thing for sure……….as long as the speculation persists……supported by 10% real buyers….who out of fear of being priced out keep buying. property prices will keep going up………dont know exactly how far……..but if tokyo market is a bench mark……….then dont be surprised if a 3 bed apartment in bangalore is selling for 1 crore.

    my gut feeling says that in indian conditions……1 crore for 3 bed apt is highly impossible. but speculation is a strange game…..we never know all the billionaires of india….may have started buying with all their money since stock market is so unreliable these days……property has been doing great.

    lets keep this blog alive….till people see some reason and stop being enslaved to their house…

    Comment by TECHY2468 — June 29, 2007 @ 8:37 pm

  309. i maybe be repeating a lot….please excuse me…i just want the new readers to get the data (most people wont read this whole blog).

    my parents are renting a single family house on a 30×40 site in kanakapura road, bangalore for rs.5k, current price of that 1000sft house is 27 lacs.

    if you deposit 27 lacs in bank….at 10% you get rs.22500/month……….can you see the difference……rent is 4.5 times less than interest earned on a 100% safe and 100% liquid deposit in a gov backed bank.

    i think mortgage for the same house must be around 30k (rough estimate).

    i am sure same is the story with every housing unit in india… is atleast 5 times less than mortgage payment.

    but the owner of my parents house….must have bought it 5 years back…and he may not be savvy investor……and of course….his investment has tripled in this house in the last 5 years….so i can understand why he wont sell it unless prices correct by 20-30%…..then he may sell out of fear of losing all of it.

    Comment by TECHY2468 — June 29, 2007 @ 8:59 pm

  310. surprised to see that everyone assumes that homes in india are bought with bank loans. leaving aside apartments from reputed builders, almost all the plots, houses, floors, shops, factories are bought in cash. i mean suitcase fulls of cash! there is no 10% interest on black money. rather cash holders are scared of income tax guys or their own servants or drivers who might slash their throat if they find out about the suitcase..

    even if you get 2-5% return on a property bought with black money (shop in mall or a house or apartment), it’s not bad right? you have a tangible asset and no worries of holding cash. in case of a RE market crash..let’s say property prices drop by half. so what, person holding black money either got it in form of bribes or was income where no taxes were paid and often times it’s the earnings from selling some previous property.

    In a crash scenario, the real losers would be the ones who signed on a 20+ yr mortgage and not the illiterate businessman who didn’t even have a bank account. Even MNCs are smart enough…they are willing to pay high rents but often not interested in “buying” offices. And ironically, these mortgage owners are the highly educated and highly paid lot! First they lose 30% in taxes to the government and remaining life on paying 13% interest on their 60 lakh apartment!!

    Comment by ashutosh — June 29, 2007 @ 10:54 pm

  311. Hey Guys…

    Its good idea to keep discussing and waiting for crash – which in my view is unlikely to happen. What is more likely is that, the prices would be stable and you have option to look around!!

    India is a growth story – even if you randomly throw money in some investment buckets (for long term) you would be happy individual a few years down the road.

    Check the real story – for investments – you still can check for groth potential and get apartment for Rs. 20L..

    Saw a article in Economic Times today – # of (US$) millionaires in India grown by 30% – possibly highest in India.. In 2006, Most of the new money of millionaires have gone in to property (richy –rich knows how to manage money? Probably, they do and that why they are what they are ?). World wide figure is 30% of money goes into real estate assets (could not find link!! I saw in hard copy)..

    Hence, lets check if there is some possible good options. Nice week end.

    Happy Investing!!

    Comment by Sayaji Hande — June 30, 2007 @ 8:42 am

  312. Here is link for the other article..

    Comment by Sayaji Hande — June 30, 2007 @ 8:58 am

  313. We all must read following article about Housing bubble and start discussig in this blog

    Comment by Bhatt — June 30, 2007 @ 10:38 am

  314. One of My Sindhi Friend Mr.Ramesh sold his flats in Bombay, Bandra (west), Turner road its 750 Build up area @ 1.10 Cr. and kept money in Fix Depost and getting 10% intrest on it staying righ now at CBD Bellapure nice sea facing furnish 2 bed room aparment with all modern facility ,with club house , CC TV ,power lift etc. and paying rent Rs.8000/-per month he having factory at Taloja so work place also nearby , and he say with confidence that he will buy same flats in Bandra @ 50 Lac with in 2 year and really rates are started drasticlly started slidding so its great idea if you have Apartment sell right now and buy later

    Comment by Bhatt — June 30, 2007 @ 12:53 pm

  315. bhatt – you saying that someone wrote a check for Rs.1.1 crore to your friend. pls check again. on a property worth 1.1 crore, you’ll be lucky to get more than 40 lakhs in white. and then capital gains tax on top of that.

    Comment by ashutosh — June 30, 2007 @ 7:30 pm

  316. Bhatt,
    The article which you are referring to is dated January 2006, so it is quite old, nevertheless the authors predictions seem to be coming true at least as far as the US Housing market is concerned. In India, the bubble is not due to easy loans by banks but more due to the sudden wealth generated by businessmen ( and maybe politicos) in the past two years (thanks to the booming economy) and not enough financial savvy (or desire to be opaque)on their part to invest it in other legit businesses.

    Comment by Sane Voice — June 30, 2007 @ 8:25 pm

  317. Any one out here have some good investment idea? Or we are going to wait for prices to come down? I see lotsa growth in cities like Nagpur.. Any one have some idea about prevailing rates? Never went inside that city..

    Comment by Sayaji Hande — July 1, 2007 @ 4:25 pm

  318. I have been studying Bangalore property market for the last 6-7 months.I interacted with some real estate agents also.They say the transactions have come down drastically.The reason seems to be interest rate hike.There is a corection of 10-15% in some areas.But if you are looking for property from reputed builders the prices are not going to come down that much.Last week some body known to me bought a flat at Purva Fairmont in HSR layout for Rs.4000 per sq.ft .So the total cost of a 1600 sq.ft(Super built up area ) flat was 64 lakhs.

    Comment by nsk — July 2, 2007 @ 8:42 am

  319. I have been tracking the real estate trends for last couple of years or some times with awe, sometimes with shock, sometimes admiring ( the growth rates ) and in the process of too much analysis, did not invest in any property – only time is going to tell if it was good or bad.
    But this is my view point. Most of the comparisons above are to the US Real Estate Market, there are some similarities but we need to understand Indian scenarios is unique in lot of ways. While some of the factors like economy growth, local potential due to new free zones, IT parks, workforce availability and Quality of Lifestyle can be predicted, the impact of Black Money, Fake Money, Land Mafia which have a huge impact cannot be predicted.

    Land Mafia has the greatest influence as it’s a gang of people operating who belong to Real Estate Agents ( most of them ex-goondas ), Politicians, Government Employees ( Corporation and Registration Department Employees ) and even some Judges. So what ever anybody tries to do, this Mafia has the capacity to stop the change. For Example, in spite of revenues in crores, the registration department is the most outdated system in India. The Government does not reduce the Stamp Duty which will encourage people to declare the original price of the property, now the people take the risk becoz they save in Lakhs.

    The above may sound quite dramatic but its true and the link between this and raising prices is predictable. Indian Real Estate is the place where these Mafia guys can make and hide all the illegal money. And as they are ruling, if they have plans to approve any Free Zones, before any formal announcement, major portion of the surrounding areas is bought by all these Mafia’s through benami buyers. Now we, sitting outside India may think it is impossible for the Mafia to be so organized, but the fact is yes, its organized gang and they know exactly what they are doing and this is cutting across all party lines.

    So the bottom line is yes there can be strong corrections based on the locality. The Mafia does not wait till it peaks they know when to enter and when to exit. The guys who will suffer are

    1. NRI like us who don’t what’s happening in India – We hear people doubling money within a year and we want to investment somewhere and join the party which is a sure shot to misery. Even if we invest in a real estate, we need to make sure that there is somebody in India to take care of the property, or you may be offered some “Chai” next time you visit your so called “home” back in India ( there is guys out there to grab properties )

    2 Working class in India which is divided into 2 categories. The high earning, low common sense techies who want to buy apartments for 75-100 Lakhs and the sensible local people ( there may some techies in this category ). The advantage the local guy has is that he knows the trend and can feel the pulse – so he will jump only if he is so sure. The first category techie is in a different world and will work for the entire life, earn lot of money but cannot see that at the end of the career.

    My advise is not to run away from the real estate market, but keep looking for “not so hot” locations, locations which have potential and mainly locations you know about . Try to befriend one of the mafia guys and know the pulse ? but invest in only cities you know and you have somebody to care of the property.

    The above are my thoughts and lot of people may agree or disagree and am looking forward for a feedback.

    Comment by Srini Guru — July 2, 2007 @ 4:43 pm

  320. Just to add to the above, the mix of Mafia led speculation and real growth is like the term smog. We will never know how much is the Smoke component and how much is the Fog component and the worse thing is that, it varies from place to place.

    Comment by G — July 2, 2007 @ 4:57 pm

  321. Srini Guru,
    Your investment strategy with respect to RE has been correct(Study and research followed by value investments).
    Its just that insane speculations/psychology have made sane strategy look insane( In 2-3 years RE prices shooting 4-5 fold).

    Comment by AHP — July 2, 2007 @ 5:54 pm

  322. sayaji…..i am sorry but india/china has reached a saturation point where you never know which side the pendulum is going to swing now.

    real estate is sure crazy thing to invest right now…..i would say the probability of losing money is almost 60% if someone is very smart on the ground and can build some apartments quickly thats a different story…

    stock market is almost priced on the higher side……until and unless one knows the future exactly its very hard to find a good buy in the stock market.

    i have chosen to go the way of 100% safety….almost 9% return bank deposits.

    of course one needs to make arrangement for a primary residence…..thats a different calculation altogether…

    i have a hunch that in the next 18 months…..the government is going to relax the vertical side of construction so much…..(right now bangalore far is 2 – 2.5, i am hoping for atleast 4-6) that we can see apartments almost everywhere in the heart of city…..

    apartment at the price of 4000/sft……i dont think its a good investment….but land at 2000/sft in a new upcoming area….may still be a good investment (if that area develops well in next 2-3 years, that land can go for almost 3500-5000)

    Comment by TECHY2468 — July 2, 2007 @ 7:20 pm

  323. This has been a fantastic thread. Thank you all for being so engaged.

    Unfortunately, we have to close comments on this post, for multiple reasons — technical and more importantly, utility. Many comments are rehashing themes that were covered in earlier comments.

    If you have a strong opinion on the Indian real estate market and want to have your say, please submit a guest post to us (with hyperlinks) at

    Thanks once again

    Comment by Prashant — July 3, 2007 @ 3:02 am

  324. [...] Comment on Is There A Bubble In Indian <b>Real Estate</b>? by Srini Guru Comment on Is There A Bubble In Indian <b>Real Estate</b>? by Srini Guru I have been tracking the <b>real estate</b> trends for last couple of years or some times with awe, sometimes with shock, sometimes admiring ( the growth rates ) and in the process of too much analysis, did not invest in any property – only <b>…</b> Get Social, Bookmark Us!!:These icons link to social bookmarking sites where readers can share and discover new web pages. [...]

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  325. [...] There are two types of fears in the US markets, one is the burst of Sub prime Mortgage bubble and other is the risk of bursting of the Chinese bubble. Well, whether these could be called bubbles or an overheated condition is a matter of debate. We are trying to use the popular (easily understood) language. If the weak housing data keeps coming in and the real estate sector in US keeps languishing, it may put a downward pressure on the equity markets and moreover, the Indian housing and real estate market will also be affected as a number of NRIs from the US invest in Indian Real Estate and once there is slump in US real estate they might slow down their Indian investments. You can see the tone of some NRIs in the comments posted in this post. [...]

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  326. [...] Comment on Is There A Bubble In Indian <b>Real Estate</b>? by Srini Guru Comment on Is There A Bubble In Indian <b>Real Estate</b>? by Srini Guru I have been tracking the <b>real estate</b> trends for last couple of years or some times with awe, sometimes with shock, sometimes admiring ( the growth rates ) and in the process of too much analysis, did not invest in any property – only <b>…</b> [...]

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  327. [...] There are two types of fears in the US markets, one is the burst of Sub prime Mortgage bubble and other is the risk of bursting of the Chinese bubble. Well, whether these could be called bubbles or an overheated condition is a matter of debate. We are trying to use the popular (easily understood) language. If the weak housing data keeps coming in and the real estate sector in US keeps languishing, it may put a downward pressure on the equity markets and moreover, the Indian housing and real estate market will also be affected as a number of NRIs from the US invest in Indian Real Estate and once there is slump in US real estate they might slow down their Indian investments. You can see the tone of some NRIs in the comments posted in this post. [...]

    Pingback by CNET ONLINE NEWS BLOG » Blog Archive » Will the Sensex go past 15000 this time? — October 4, 2007 @ 7:36 pm

  328. [...] was a post on IEB in December 2006, on whether there was a bubble in Indian real estate (Link), courtesy IEB reader Annamalai [...]

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