Comments on: The Indian Real Estate Bubble — circa 2008 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/ Issues & insights Fri, 8 Aug 2008 19:16:52 +0000 http://wordpress.org/?v=2.3.1 By: Cool Head http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268367 Cool Head Fri, 08 Aug 2008 18:00:10 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268367 Oberver, this was how houses and apartments used to be built earlier. In the earlier days, people of a community or working in a company, used to pool together resources, form a society, THEN buy land and construct a colony. In fact, our first apartment where I used to stay as a kid, was built in such a way, in Mumbai. Sometime around the late 1970s-1980s the "builder" as an animal came into the picture, followed by goons, followed by dubious politicians and as they say, the rest is history. You will not find such an unholy nexus anywhere in the world, maybe not even in Sicily! Oberver, this was how houses and apartments used to be built earlier. In the earlier days, people of a community or working in a company, used to pool together resources, form a society, THEN buy land and construct a colony.
In fact, our first apartment where I used to stay as a kid, was built in such a way, in Mumbai.
Sometime around the late 1970s-1980s the “builder” as an animal came into the picture, followed by goons, followed by dubious politicians and as they say, the rest is history. You will not find such an unholy nexus anywhere in the world, maybe not even in Sicily!

]]> By: Observer http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268366 Observer Fri, 08 Aug 2008 15:03:16 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268366 One way around this might be to form a consumer-led builder's association. A group of consumers should get together, and then register themselves as a non-profit trust. Identifying land, purchasing the land, and the constructing apartments on the land could be carried out by hiring some professionals like lawyers, contractors, and managers. This should remove the profit margin component, and prices could be lower by 20-30% if handled this way. Of course, this calls for spending a significant amount of time by each of the trustees, but the savings should be worth it. To achieve economies of scale, at least 30-40 people should get together to start this effort. One way around this might be to form a consumer-led builder’s association. A group of consumers should get together, and then register themselves as a non-profit trust. Identifying land, purchasing the land, and the constructing apartments on the land could be carried out by hiring some professionals like lawyers, contractors, and managers. This should remove the profit margin component, and prices could be lower by 20-30% if handled this way. Of course, this calls for spending a significant amount of time by each of the trustees, but the savings should be worth it.

To achieve economies of scale, at least 30-40 people should get together to start this effort.

]]> By: Atul http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268365 Atul Fri, 08 Aug 2008 13:07:06 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268365 All said and done well..... I agree with the Observer and terrified with the thought of Cool Head. However the fact at the moment for Pune is that Builders have ego issue reducing the prices. They are not going to reduce the prices even if the market crashes vertically !!! They are ready to sell their companies and be bankrupt but are not ready to bring down the prices. In fact, I have seen few of them have increased the price in last 15 days. Example: Mirchandani Palms in Pimple Saudagar is quoting 3600/- psqft. I just came out of his office without further discussion !!! "Sir kata sakte hain leking sir jhuka sakte nahin !!!'. Jai Shivaji. Jai Maharashtra. All said and done well…..

I agree with the Observer and terrified with the thought of Cool Head.

However the fact at the moment for Pune is that Builders have ego issue reducing the prices. They are not going to reduce the prices even if the market crashes vertically !!! They are ready to sell their companies and be bankrupt but are not ready to bring down the prices. In fact, I have seen few of them have increased the price in last 15 days. Example: Mirchandani Palms in Pimple Saudagar is quoting 3600/- psqft. I just came out of his office without further discussion !!!

“Sir kata sakte hain leking sir jhuka sakte nahin !!!’.

Jai Shivaji. Jai Maharashtra.

]]> By: Cool Head http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268361 Cool Head Fri, 08 Aug 2008 07:11:01 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268361 Well said! Unfortunately, if you read the media in India,you will think India is just on the verge of being a superpower! I wonder what will happen when the "growth story music" stops. Too many people have suddenly got too much (undeserved) money. When the inflows stop, coupled with the bad habit of earning easy money, I do not how all this may pan out. The "real estate boom" is just one aspect of all this. Well said!
Unfortunately, if you read the media in India,you will think India is just on the verge of being a superpower! I wonder what will happen when the “growth story music” stops. Too many people have suddenly got too much (undeserved) money. When the inflows stop, coupled with the bad habit of earning easy money, I do not how all this may pan out.
The “real estate boom” is just one aspect of all this.

]]> By: sooth_sayer http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268350 sooth_sayer Thu, 07 Aug 2008 03:43:23 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268350 Observer, thanks for chipping in with those comments and addressing Ashish's false pretence of ignorance of Pune's or any other of India's real and ridiculous stats. I have seen Ashish's blog and think he is really smart and passionate in what he is doing and has made a lot of great investments in the past few years. However, all good things must come to an end, and even Ashish will or has already realized this, and is only trying to keep the boat afloat for as long as he can. I am not even sure if any company in the USA outsourcing to India makes any money currently, as it takes 3-4 persons in the outsourced world to do the job of one person in the USA. With increasing IT salaries in India combined with the sheer lack of competence, it is a perfect storm to sink the ship. 90% of the population can ride on the success of the other 10% for only a while. Mark my earlier post about the coming dark age in India because of the collapsing social fabric. Observer, thanks for chipping in with those comments and addressing Ashish’s false pretence of ignorance of Pune’s or any other of India’s real and ridiculous stats. I have seen Ashish’s blog and think he is really smart and passionate in what he is doing and has made a lot of great investments in the past few years. However, all good things must come to an end, and even Ashish will or has already realized this, and is only trying to keep the boat afloat for as long as he can. I am not even sure if any company in the USA outsourcing to India makes any money currently, as it takes 3-4 persons in the outsourced world to do the job of one person in the USA. With increasing IT salaries in India combined with the sheer lack of competence, it is a perfect storm to sink the ship. 90% of the population can ride on the success of the other 10% for only a while. Mark my earlier post about the coming dark age in India because of the collapsing social fabric.

]]> By: Observer http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268331 Observer Wed, 06 Aug 2008 08:02:36 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268331 "Now, if a middle class person can afford a starter apartment at the age of 30 years, I don’t think the prices are unrealistic." A middle class person in Pune earns 9 lakhs/annum? Is this the city of Pune in India? It is very clear that investors and builders are targeting the IT/ITES/BPO/NRI types. The median income in Pune is 8,000 Rupees/month per household: http://cities.expressindia.com/fullstory.php?newsid=194461 Even if we double that figure to account for extra sources of income, the average Puneite can only afford an apartment costing 7-8 lakhs. Assuming a small 800 sq.ft apartment size (super built up area), the per square foot rate works out to be approximately 1000 Rs/sq ft. These rates actually existed approximately 5-6 years ago in many parts of Pune. People are beginning to wise up. Price rise is something that really upsets people, and can topple govts. In the next major state elections, I am sure this will come up as an issue. Even Govt control in the form of laws against investors and builders cannot be ruled out. Already the central Govt is proposing a rule that a house must be constructed within a year on newly purchased land. Investors are going to be squeezed out of the system gradually, and the market will become end-user driven. When that happens, housing costs are definitely going to fall. Already the IT industry is facing problems because of the rising cost of wages and infrastructure in India. It would be foolish to assume that wages will continue going up in the IT industry at 10% or more for many years. The profit margin of IT companies is shrinking and is now less than 25%. If overall costs including real estate/wages were to go up by another 30%, then India will lose its cost advantage, and the IT industry will be severely affected. Job security is disappearing fast. What will happen then to real estate is then quite obvious. Real estate prices in India are heavily dependent on one sector of the economy. All imbalances eventually correct. History has always shown this to be true. “Now, if a middle class person can afford a starter apartment at the age of 30 years, I don’t think the prices are unrealistic.”

A middle class person in Pune earns 9 lakhs/annum? Is this the city of Pune in India? It is very clear that investors and builders are targeting the IT/ITES/BPO/NRI types. The median income in Pune is 8,000 Rupees/month per household:

http://cities.expressindia.com/fullstory.php?newsid=194461

Even if we double that figure to account for extra sources of income, the average Puneite can only afford an apartment costing 7-8 lakhs. Assuming a small 800 sq.ft apartment size (super built up area), the per square foot rate works out to be approximately 1000 Rs/sq ft. These rates actually existed approximately 5-6 years ago in many parts of Pune.

People are beginning to wise up. Price rise is something that really upsets people, and can topple govts. In the next major state elections, I am sure this will come up as an issue. Even Govt control in the form of laws against investors and builders cannot be ruled out. Already the central Govt is proposing a rule that a house must be constructed within a year on newly purchased land. Investors are going to be squeezed out of the system gradually, and the market will become end-user driven. When that happens, housing costs are definitely going to fall.

Already the IT industry is facing problems because of the rising cost of wages and infrastructure in India. It would be foolish to assume that wages will continue going up in the IT industry at 10% or more for many years. The profit margin of IT companies is shrinking and is now less than 25%. If overall costs including real estate/wages were to go up by another 30%, then India will lose its cost advantage, and the IT industry will be severely affected. Job security is disappearing fast. What will happen then to real estate is then quite obvious.

Real estate prices in India are heavily dependent on one sector of the economy. All imbalances eventually correct. History has always shown this to be true.

]]> By: Ashish Abrol http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268327 Ashish Abrol Tue, 05 Aug 2008 16:22:29 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268327 Sooth_sayer, If salaries of the buying population is not a relevant criteria to determine affordability, I'm not sure what should be? I do not have answers to all the questions u have asked but it appears u do. Therefore, why don't you share some of the statistics available with you? I would like to be enlightened about the excess supply in Pune. I tend to trust numbers. If you have numbers to support your argument, i'd love to be educated. However, based on the strawbery box in Australia principle.......I'm a reluctant convert. Sooth_sayer, If salaries of the buying population is not a relevant criteria to determine affordability, I’m not sure what should be? I do not have answers to all the questions u have asked but it appears u do. Therefore, why don’t you share some of the statistics available with you? I would like to be enlightened about the excess supply in Pune. I tend to trust numbers. If you have numbers to support your argument, i’d love to be educated. However, based on the strawbery box in Australia principle…….I’m a reluctant convert.

]]> By: Loknath http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268311 Loknath Tue, 05 Aug 2008 06:17:58 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268311 whatever is said about IT ppl and whatever other people perceive of IT guys is 1000% correct. I am a decently paid IT guy too and theres no hiding from the fact that its these IT jonkers who have single-handedly screwed the realty prices making it unaffordable for themselves and other better and useful people in the society too. Though IT incomes could be marginally higher on the average but buyers of properties are largely the IT animals. Take any place in Pune- Aundh, Kalyani nagar, Kothrud, Hadapsar and the sickening place Pimple saudagar where i live, these were @Rs.400-700 psqft in 2005 by those times standards it was 1-2 years of incomes of decent professionals. Now even the ugliest of properties cost Rs. 3000-5000 psqft.. and this is for those apartments which had no qualified engineer or an architect to even design and supervise the construction. These apartments are still made by archaic formworks by some experienced "masons" turned engineers. God forbid, an earthquake of 7.0 and voila, i bet more than 50% will collapse. I have been a victim of 2001 gujarat earthquakes and its no wonder the buildings that collapsed had faulty designs, cheap bricks (they arent even baked in the kiln for 72 hrs.. so much demand you see), pulverized sandstones. (wheres the sand) and uncured slabs (construction time = money). so guys the conclusion is.. even if you can afford dont buy it. Its worth spending the EMI's on wine, women and bbq, that would fuel a much fatser growth of economy and we would end up richer still. whatever is said about IT ppl and whatever other people perceive of IT guys is 1000% correct. I am a decently paid IT guy too and theres no hiding from the fact that its these IT jonkers who have single-handedly screwed the realty prices making it unaffordable for themselves and other better and useful people in the society too. Though IT incomes could be marginally higher on the average but buyers of properties are largely the IT animals. Take any place in Pune- Aundh, Kalyani nagar, Kothrud, Hadapsar and the sickening place Pimple saudagar where i live, these were @Rs.400-700 psqft in 2005 by those times standards it was 1-2 years of incomes of decent professionals. Now even the ugliest of properties cost Rs. 3000-5000 psqft.. and this is for those apartments which had no qualified engineer or an architect to even design and supervise the construction. These apartments are still made by archaic formworks by some experienced “masons” turned engineers. God forbid, an earthquake of 7.0 and voila, i bet more than 50% will collapse. I have been a victim of 2001 gujarat earthquakes and its no wonder the buildings that collapsed had faulty designs, cheap bricks (they arent even baked in the kiln for 72 hrs.. so much demand you see), pulverized sandstones. (wheres the sand) and uncured slabs (construction time = money). so guys the conclusion is..
even if you can afford dont buy it. Its worth spending the EMI’s on wine, women and bbq, that would fuel a much fatser growth of economy and we would end up richer still.

]]> By: sooth_sayer http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268302 sooth_sayer Mon, 04 Aug 2008 19:32:22 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268302 Ashish, You cannot quote the salary of IT employees to justify this, as by that fallacious argument, anything could be justified anywhere in the world. What percent of the Pune population works in the IT industry? What is the per capita income of Pune? What is the median apartment (yuck, not even a real house) price in Pune? How many households exist in Pune and what is the number of houses in Pune? Find the honest answer to those and then calculate the multiple of apartment price to per capita income/demand and supply numbers. Ashish, You cannot quote the salary of IT employees to justify this, as by that fallacious argument, anything could be justified anywhere in the world. What percent of the Pune population works in the IT industry? What is the per capita income of Pune? What is the median apartment (yuck, not even a real house) price in Pune? How many households exist in Pune and what is the number of houses in Pune? Find the honest answer to those and then calculate the multiple of apartment price to per capita income/demand and supply numbers.

]]> By: Ashish Abrol http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268299 Ashish Abrol Mon, 04 Aug 2008 16:31:15 +0000 http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/#comment-268299 Let's look at the strawbery box principle and if it applies to Indian RE markets. The strawbery box principle-The article certainly makes for an intersting read and clearly succeeds in creating fear amongst the reader. However, on further dissection, you may notice that the entire article uses only two substantative numbers to make a point (whatever that point is) -(a)3% yield on rentals is too low and, (b)don't use more than 25% of income on paying your monthly mortgage. I agree with both the points. However, this is where I differ. Let's look at the Pune market based on data available on axiomestates.com. Lised on axiomestates are 9 projects varying in price from Rs.25.5 lacs to Rs.1 cr (with 6 options available under Rs.40 lacs). I'm trying to understand if that price is really too high to afford. Personally, I don't think so and this is why. To be able to afford an apartment of Rs.30 lacs (2BR's), one needs to have an annual income of about Rs.9 lacs (approx. 1/3rd of cost of apartment). Anyone in the IT industry with about 8 years experience and a graduate degree gets that salary. With 8 years experience, one's age is about 30 years. Now, if a middle class person can afford a starter apartment at the age of 30 years, I don't think the prices are unrealistic. I'll leave it to the readers to decide and comment. Let’s look at the strawbery box principle and if it applies to Indian RE markets.

The strawbery box principle-The article certainly makes for an intersting read and clearly succeeds in creating fear amongst the reader. However, on further dissection, you may notice that the entire article uses only two substantative numbers to make a point (whatever that point is) -(a)3% yield on rentals is too low and, (b)don’t use more than 25% of income on paying your monthly mortgage. I agree with both the points. However, this is where I differ.

Let’s look at the Pune market based on data available on axiomestates.com. Lised on axiomestates are 9 projects varying in price from Rs.25.5 lacs to Rs.1 cr (with 6 options available under Rs.40 lacs). I’m trying to understand if that price is really too high to afford. Personally, I don’t think so and this is why. To be able to afford an apartment of Rs.30 lacs (2BR’s), one needs to have an annual income of about Rs.9 lacs (approx. 1/3rd of cost of apartment). Anyone in the IT industry with about 8 years experience and a graduate degree gets that salary. With 8 years experience, one’s age is about 30 years. Now, if a middle class person can afford a starter apartment at the age of 30 years, I don’t think the prices are unrealistic. I’ll leave it to the readers to decide and comment.

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