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News & Views on Indian Real Estate

Monday, July 28, 2008

Real Estate in India is expected to Show Further Decline


The present time is not ideal for the realty market. The decelerated pace has affected the sector. The leading banks have increased the interest rates of home loans and the inflation level is also rising. Therefore, putting together, the probable property buyers are feeling dejected. But perhaps there may be a silver lining. The prospective buyers are delaying their home-buying decision to buy properties because of a widespread conjecture of probable price reduction in times to come. How long one should wait and watch is however not known. Anuj Puri, the chairman and country head of the operations of the international real estate consultancy Jones Lang LaSalle Meghraj (JLLM) in India, says that the correction will take 4 to 6 months depending on the local trend of the market and the holding power of the developers operating in that location. JLLM also makes a forecast of 5 to 15% probable price reduction in different hyped micro markets of Pune, Bangalore, Gurgaon, Noida, and other such locations. The real estate India appears to be going through a rocky period. The real estate markets of South Mumbai, several other places in Mumbai suburbs, and some locations in New Delhi may experience a price reduction of even up to 10%. These areas already have seen unreasonable price trends. As per Mr. Puri, the problems for the developers to finish the existing projects as well as initiate new projects will escalate which will result in reduced incoming supply. This will also increase the consumption time needed for the existing supplies. The prospective buyer of India property will reschedule the decision of purchasing property because of his or her limited disposable income. Sonepat and Ghaziabad property market however has been quite stable and has attracted a lot of investors.

moti said...

Real estate prices in bubble zone



Current Market Situation May Not Be Conducive To Property Purchase, Cautions Amar Pandit




THE question that bothers a lot of prospective home buyers is whether they will miss the bus if they wait any further. However, the right question should be: Can I afford to buy a house today? Even if you are one of those blessed ones, the thought should be: Is it a fair price for the house? Your house might not be an investment, but does that mean you should pay any price for it? The prices currently being quoted are simply atrocious. From a time, not too long ago, when people talked about loans of Rs 10 lakh to Rs 50 lakh, today the average loan size is substantially higher.
A simple 2-bedroom house in Malad can cost up to Rs 1.2 crore (including stamp duty and registration charges). This is the price that sellers expect, but this does not mean they are actually getting it. The cost of a similar flat 4 years ago was close to Rs 30 lakh.
The entire real estate boom took off in 2003 on the back of very low interest rates and low prices. However, the situation has changed now with realty prices going up 3-4 times, while interest rates are 60-70% higher. Incomes have certainly not grown four-fold in the past four years. Today, even if you are earning Rs 25 lakh annually, it is extremely difficult to buy a 2-bedroom house in the suburbs.
Even if you make a down payment of Rs 20 lakh, you will still end up borrowing close to Rs 1 crore. This would mean an EMI of close to Rs 1 lakh per month. So, after tax and EMIs, a person with Rs 25 lakh gross income will be left with just Rs 5-6 lakh as disposable income for lifestyle and living expenses. Once you take EPF contributions, you will just be left with Rs 4 lakh annually.
Lifestyle inflation (driving a car, visiting malls, eating out & entertainment), which is much higher than normal living expenses, eats up a significant portion of one’s income. Hence, it is just not possible even for someone earning Rs 30 lakh to service an EMI of Rs 1 lakh every month. Even if you do manage to do it, you will be left with no savings.
So, what should you do? Should you buy a house today? Real estate prices, though location-specific, have been witnessing a slowdown in demand. One might argue that luxury accommodations might not be impacted by this. However, there is a visible slowdown in real estate and prices are down on an average by 10-15% in places like Mumbai. Unlike the stock market, there is no index for the real estate market and no price-discovery mechanism. In fact, the price discovery is very subjective and identical properties in the same building can go for two different prices. If one had a real estate index, it would have had given details on number of transactions. Thus, enabling one to witness the slowdown that has started last year itself.
There have been several reports of builders borrowing at very high interest rates and some defaulting on their interest payouts. In fact, real estate stocks have been hammered the most and the basic assumptions on which their landbanks were valued are a matter of debate now. I believe the stock market here is one leg ahead of the realty market and there is a lot more pain to come in the residential segment. One is also witnessing a lot of projects being delayed and redevelopment schemes being postponed.
Speculators have started to exit since late last year and investors trying to exit now are unable to get the price they could dictate some time back. With rising interest rates, demand should come down. However, location still rules and some premium commercial property could still fetch good money. Not that it is any indicator, but if you look at the price-to-rent ratio (PR Ratio) similar to PE ratio, one can clearly see that the prices are in the bubble territory.
Since there are no margin calls in the realty space, the holding capacity of an investment can be substantially higher than a leveraged exposure in stock market, where margin calls have to be attended immediately. Hence, real estate prices generally do not fall drastically.
Small builders are cash-starved and are not getting into new projects. This is the case with mid-size developers. However, big builders with access to IPO funds and PE funds can wait for an extended period of time before cutting prices. One can clearly see that the discounts offered in the form of stamp duty waivers or furnishings are nothing but a desperate attempt to get end-users.
Like in the stock market, it pays to be patient in the real estate market too. For realty market to sustain itself, there should be a steady inflow of end-users. Speculators and investors can only take it to a certain level. End-users can only come when prices are affordable and for that at least 30% correction is a must. If you have been eyeing a property for some time, don’t just think twice, think several times before you sign on the dotted line. Be patient for the next 12-18 months and you are bound to come out as a winner.

Pawan said...

Good point Moti.
A lot of idiot self-confessed real estate-pundits are propagating the theories that property markets have cooled off because interest rates have gone up and the markets will be back to its former self as interest rates come down. What they fail to see is that the real reason is not a 30-50% increase in EMI but the 3-5 times increase in price.
When the property bull run started some 5-6 years back, you effectively had to pay 50% extra for the EMI as compared to the rent you were paying. Now the EMI for a house is 4 times the rent for the same house. Where is the scope left for error when deciding between renting and buying then?

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