Cost of a good 3BHK apt these days can easily go up to 1C (including stamp duty,furnishings, car park etc).

Assume you put the minimum required 20L down.

EMI on 80L = ~80K per month. (10.5% interest for 20 years)
Approx. expenses (health care,children education,apt maintenance, petrol, insurance,food, groceries etc) = ~25K per month.
Total expenditure(with 0 savings) = 1.05 L monthly or 12.6L per year. Assume 15L since there could always be other one off expenses.( obviously people want to save for their kids' future, travel, buy gadgets, jewelry etc.)

To spend 15L, one needs to make at least 20.5L per year(assuming at 27% tax bracket).

How many households have 20.5L income? Esp what about the single guys or where one's spouse is in an average earning profession?

Seems like 1C for an apt might already be close to limit unless incomes start rising rapidly.

If you invest in an 1C apt, to get 12% CAGR at the end of 5 years, you should be able to sell it at 1.76C. Going by similar calculation as above to buy an apt of 1.76C, one needs to make over 27L.

I ignored factors like deferred payments till possession, tax savings etc to make the calculation simple. I suspect it won't make any big difference.

Considering the earning potential of buying market, is investing in expensive apartments still a good idea? There is always a luxury segment, but I'm just talking about a decent 3BHK somewhere in city or OMR. Also, I'm not sure if apartments attract lot of black money business folks,politicians. Anecdotally most people buying 3 BHKs are educated white collar folks. So, can apartments still give a 15% y-o-y return? (1C apt becoming 2C in 5 years). Looks very unlikely unless some miracle happens among the buyer segment(salary also doubling in the same period).

Maybe apt prices can go 2C (if it can go in Mumbai, why not in Chennai :). Then there are other factors like NRI buyers, people who go onsite regularly etc that messes up the income calculation hard. But it seems like apt prices are slowly becoming out of reach. Think about guys like teachers, govt employees, bank clerks, non IT engineers etc.
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  • Rental prices not catching up is a clear warning sign. Or should one just invest with the hope of finding a "greater fool" (as pointed by SR in another thread) :)
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  • Originally Posted by randomguy

    Maybe apt prices can go 2C (if it can go in Mumbai, why not in Chennai :). Then there are other factors like NRI buyers, people who go onsite regularly etc that messes up the income calculation hard. But it seems like apt prices are slowly becoming out of reach. Think about guys like teachers, govt employees, bank clerks, non IT engineers etc.



    Simple answer is RTM 3BHK cannot go to 2C
    Teachers Bank finance manufacturing staff Doctors, College lecturers/prof, Govt staff all are on the income levels of 3Lakhs to 15L
    even if you compound dual income you are looking at 20L for common average couple not the IT folks
    so its going to be very very hard to justify 2C
    but you are always going to hear cost of construction is going up, land prices are going up flat pricing needs to go up
    All is true, ONLY until when you find a WILLING and ABLE buyer comes to the table with the money or loan approval
    Once that slows all these will level , we have to wait and watch but 12% CAGR is not realistic in flat pricing
    Land is always going to be scarce and rare
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  • Originally Posted by randomguy
    Rental prices not catching up is a clear warning sign. Or should one just invest with the hope of finding a "greater fool" (as pointed by SR in another thread) :)


    Actually greater fool theory will always hold water when asset is valued by a ladder of buyers without any fundementals
    there are only few variables for RE market

    1 - Interest rates --
    2 - Affordability/Jobmarket/macro ecnomic strength -
    3 - Population density/demand & supply control -
    4 - Residual rental yields

    All the readers here know where we are on the 4 variables
    Dont count the investors, they come and go, if the wind blows hard they will go to newer asset classes
    The only segment that is long standing is end use
    (For the record i fall under investor NOT end use)
    Most RE crashes or stagnations are caused by tail end riding investors who want to make a quick buck
    The true question is ARE WE THERE YET
    how many layouts / new flats / projects have more than 60% end use customers. if the ratio is 50-60% end use we are in good shape if its other way around we are in a mess atleast for flats
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  • Originally Posted by randomguy

    How many households have 20.5L income? Esp what about the single guys or where one's spouse is in an average earning profession?


    Very few I agree. First time buyers however do not start at the top at a 1C 3BHK. They start at the bottom and work their way up, just like their job roles and salaries.

    For example my parents can buy a 1C property for them to live. If I chose to live in Chennai I will not be able to afford it, even though I'm a software professional. I'll probably buy a 2BHK for 20-30L way far out of CBD and commute.

    Most 1C+ properties are not bought on 80% loan by the general public. They sell their existing property to someone starting out like me, generate atleast 30L from their sale, have 20L saved or inherited, and buy a 1C property with 50L loan at ~50K monthly EMI (salary around 9L per annum).

    I will probably wait until I get a humongous raise, or my kids are past needing to be paid for tuition etc, and then have 10L saved by then, offload my property for 40L (assuming minimal appreciation), have 50L (10+40) in hand, take a 50L loan and buy a 1C property 10-20 years from now. :)
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  • Expensive Apts and most Apts in townships/gated communities are not bought by people with lower incomes. Mostly bought by IT folks, NRIs and people with additional income sources. I have posted it somewhere but I cannot find it in my posts. Lets do it again. I will edit as you want, but it is to give you an idea.

    Let me throw some random numbers,
    Chennai has 50L population (old city). Govt employees, businessmen, politicians, sportsmen, actors and HNIs make up atleast 3-4L of out this. 1-2L of this population will buy a property every 5-10years.

    IT folks, high income guys might number to 50K-1L easily. MNC, C-level execs making 25L+ per year.

    NRI investors who buy a property every 10 yrs might number to 50% atleast. Middle East/Singapore guys put big money. UK/US guys also put in decent amounts.
    NRI property buyers itself will amount to 1L.

    Upper middle class people who did not fall into any of these buckets will be another 50K-1L. Rich rural TN folks will make up another 50K-1L.

    So at any point in time 5-6L people are looking for property and will make a buy once in 10 yrs atleast. So we need 50K units a year atleast.

    Apt supply is still around 10K-20K per year for whole of the metro area. Corporate demand for housing is around 2-3K units a year. City supply is less than 1K. It is not a big deal for us to consume. Remember the supply in the coming years will get reduced, as most of our supply is from projects started in 08-09 period. There are very few launches now.

    So Affordability not a big deal.

    Coming to appreciation, 12% CAGR for construction cost is a sure shot. It will be more than that easily. Labor costs can grow at 25-30% per year. Land cost, I am not sure, it could plateau in some areas. 5% will happen even conservatively overall.

    We are half a decade or bit more behind Bombay.
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  • Originally Posted by k11
    We are half a decade or bit more behind Bombay.


    This!

    And about three to four decades behind Manhattan. :)
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  • Originally Posted by SmartCard
    This!

    And about three to four decades behind Manhattan. :)


    But, I think Chennai (and Mumbai for sure) is more expensive than Manhattan,

    Some average estimates
    Per sq.ft in Manhattan 1000$ (55000 INR)
    Median household income 100K$( 55L INR).
    Avg 1BHK rent 3K(1.6L)
    Avg mortgage 4%
    Population: 16L

    Atleast to some extent fundamentals(income,interest,rent) are strong. Also income of approx 100K USD from simple googl'ing seems low. There should be hoardes of bankers,traders,lawyers etc making well north of 500K USD and might well form a good percentage of the population (compared to HNIs in Chennai or Mumbai, just guessing).
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  • RG:

    it all depends upon the infra/social infra. Once the place all have it, for an example, Good school like PSBB near by, hospitals, Malls all will change the equation. It is not a 20 - 20 day game it is 5 day test one (Going with current sport activity) you need lot of patience.

    as Sr and K11, rightly points up flat price goes up primarily because of land rate and the construction charge goes up. Still the txn happens in thiruvanmyur and Adayar area with > 10 K sqft, why primarily because good infra/connectivity in place.

    just a data point for your reference, 5k -10K segments is growing when compare to 2008 -09 where primarily dominated by 2 - 3k segment. Now < 3k segment good location is almost diminished to zero.

    Rental returns will be in stack because so many new units were launched esp. targeting south chennai. Expecting a repo cut to another 25 bp will boost some RE sales as well.

    Investors with lower budgets are now targeting with 2 BR / 1 BR. we dont have any pretty decent sqft for 2BR for new launches, and the investors will not care about the sqfts, FP and all.

    We are expecting the flat price to take U turn, but the invested plot price has to hit the sealing... how is it possible?


    Originally Posted by randomguy
    Cost of a good 3BHK apt these days can easily go up to 1C (including stamp duty,furnishings, car park etc).

    Assume you put the minimum required 20L down.

    EMI on 80L = ~80K per month. (10.5% interest for 20 years)
    Approx. expenses (health care,children education,apt maintenance, petrol, insurance,food, groceries etc) = ~25K per month.
    Total expenditure(with 0 savings) = 1.05 L monthly or 12.6L per year. Assume 15L since there could always be other one off expenses.( obviously people want to save for their kids' future, travel, buy gadgets, jewelry etc.)

    To spend 15L, one needs to make at least 20.5L per year(assuming at 27% tax bracket).

    How many households have 20.5L income? Esp what about the single guys or where one's spouse is in an average earning profession?

    Seems like 1C for an apt might already be close to limit unless incomes start rising rapidly.

    If you invest in an 1C apt, to get 12% CAGR at the end of 5 years, you should be able to sell it at 1.76C. Going by similar calculation as above to buy an apt of 1.76C, one needs to make over 27L.

    I ignored factors like deferred payments till possession, tax savings etc to make the calculation simple. I suspect it won't make any big difference.

    Considering the earning potential of buying market, is investing in expensive apartments still a good idea? There is always a luxury segment, but I'm just talking about a decent 3BHK somewhere in city or OMR. Also, I'm not sure if apartments attract lot of black money business folks,politicians. Anecdotally most people buying 3 BHKs are educated white collar folks. So, can apartments still give a 15% y-o-y return? (1C apt becoming 2C in 5 years). Looks very unlikely unless some miracle happens among the buyer segment(salary also doubling in the same period).

    Maybe apt prices can go 2C (if it can go in Mumbai, why not in Chennai :). Then there are other factors like NRI buyers, people who go onsite regularly etc that messes up the income calculation hard. But it seems like apt prices are slowly becoming out of reach. Think about guys like teachers, govt employees, bank clerks, non IT engineers etc.
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  • K11,
    I agree with your approach, but I think some of the numbers are little aggressive.
    I feel you are overestimating the number of HNIs - 3-4L (6-8%). Maybe true, if you ask me my guess off the air would be less than 1% of population would be HNIs.

    Also, lot of HNIs need not be looking for apts, they might be hiding their black money in land rather. But, yeah NRIs form a good chunk of apt investors.

    Originally Posted by k11
    Expensive Apts and most Apts in townships/gated communities are not bought by people with lower incomes. Mostly bought by IT folks, NRIs and people with additional income sources. I have posted it somewhere but I cannot find it in my posts. Lets do it again. I will edit as you want, but it is to give you an idea.


    Yeah, but this is a problem right? As SR mentioned earlier if not too many end users are buying, to whom will the investors flip the property to? maybe other investors. But after some time, there got to be end users buying.
    But Mumbai RE seems to be out of whack (1/2 BHKs costing 1C), so maybe Chennai may also grow without fundamentals.
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  • The argument that "land is scarce" is true only in city and established suburbs. Newer suburbs have acres and acres of empty lands but still people are buying apartments when they can buy land for much lower cost. There are four reasons:

    -Lack of transparency in land dealings
    -Loan availability issues and income tax benefit.
    -Threat of encroachment.
    -Difficulty in arranging reputable contractor and difficulty in monitoring construction quality and progress due to distance issues.

    If these are taken care off, lower end apartments in extended suburbs will take a severe beating.

    Also as Arunag pointed out, it is pretty much impossible to buy apartment less than 5K in a good locality. For a budget of 4K, we can get apartment from reputed builder only in a desolate locality with no shops nearby (there are exceptions like Appaswamy Brooksdale, etc..). This was not the case till 2006 when people from wider range of budget requirements can still afford apartments in established residential localities.

    One of two things must happen:
    -City will continue to spread out as people go further and further away in search of affordable housing
    -Prices must fall.

    People are still comfortable to spread out further away from city as is apparent from success of projects like Akshaya Today, so I don't foresee prices to fall.

    Prices will continue to increase due to inflation and due to people upgrading their lifestyle, coming with greater expectation. So while budget apartments will have no choice but keep price in check and go further away from city, high end apartments will have field day.
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  • Originally Posted by randomguy
    K11,
    I agree with your approach, but I think some of the numbers are little aggressive.
    I feel you are overestimating the number of HNIs - 3-4L (6-8%). Maybe true, if you ask me my guess off the air would be less than 1% of population would be HNIs.

    Also, lot of HNIs need not be looking for apts, they might be hiding their black money in land rather. But, yeah NRIs form a good chunk of apt investors.



    Yeah, but this is a problem right? As SR mentioned earlier if not too many end users are buying, to whom will the investors flip the property to? maybe other investors. But after some time, there got to be end users buying.
    But Mumbai RE seems to be out of whack (1/2 BHKs costing 1C), so maybe Chennai may also grow without fundamentals.


    There are some very key differentiating factors
    1 - mumbai land bank is limited supply compared to chennai AFAIK
    2 - K11 numbers are very aggressive on Demand side and too conservative on supply side - 1k homes in chennai city i can count more that it will include every single mom/pop JV ofocourse
    3 - Arunag is right if flat takes a U turn land pricing will affect as well it cannot peak - but there is a small difference, the cost of holding a flat with maintenance, interest emi, vacant rentals is much higher a hassle than holding a PLOT where even today average time a owner keeps a loan on is only 5 years or so. So the owners are going to bite and hold a longer as the bleeding wont be there in the case of a flat
    4 - END use market and low end buyers are the main drivers for the food chain - FIRST time home end use buyers are the KEY for any market all these US UK Singapore Middleeast guys ( including me) will disappear from this market when crap hits the fan, the only person who will sit there and rent and buy is that first time end use buyer
    IF he is is not there the pyramid will collapse - MAKE NO MISTAKE about this
    5 - The best way to keep this market stable in IMO is this
    relax the FSI regs a bit not too much a bit, allow developers to build more sqfootage, create conditions, loan products to promote first time home buying, encourage with tax incentives, interest reductions, regn cost rebates etc to encourage this
    if we do these schemes for the LOWEST buying segment the 15-30L buying segment the rest of the pyramid will stay intact organically ....
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  • Again coming to keeping flat empty without renting out vs owning land. Both come with their own headache. In case of land, it is not just invest and forget like FD, we need check periodically that there are no encroachments and must also arrange to clear shrubbery.

    In apartments, these days rents are so low when compared to purchase price and there is this headache of repairs and renovation between each tenancy agreement that it might just make more sense to lock the apartment. Buying an apartment in extended suburb with rental return in mind is suicidal.

    If rental return is key, best option is to buy a ground of land nearby Siruseri in a place close to tea shop and parotta kadai, build multiple dwelling units and rent it out to bachelors working in IT companies. Rental return will be unbelievable. I personally know a person who invested 50 lacs in Kelambakkam a few yrs back and getting close to 50k every month.

    Apartments are not preferred by bachelors because they are generally too far away from basic necessities. I'm not sure even families would prefer to rent out apartments in these far off places.

    The key issue in buying apartment for investment is monthly maintenance. If maintenance is less than 5000 (my tolerance level), one can still bite the bullet and keep it locked until capital appreciation catches up.
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  • Originally Posted by randomguy

    I agree with your approach, but I think some of the numbers are little aggressive.
    I feel you are overestimating the number of HNIs - 3-4L (6-8%). Maybe true, if you ask me my guess off the air would be less than 1% of population would be HNIs.

    Also, lot of HNIs need not be looking for apts, they might be hiding their black money in land rather. But, yeah NRIs form a good chunk of apt investors.

    Yeah, but this is a problem right? As SR mentioned earlier if not too many end users are buying, to whom will the investors flip the property to? maybe other investors. But after some time, there got to be end users buying.
    But Mumbai RE seems to be out of whack (1/2 BHKs costing 1C), so maybe Chennai may also grow without fundamentals.


    Agree, I might have casued some confusion. I should have said 'High Income' instead of HNI.
    There might be 2L people easily earning 20L+ a year. Not just businessmen but guys like shop keepers, food stall owners, etc can easily pull out 1.5L a month. Actual HNIs, people over 1C income will be less than 50K for sure.

    My numbers are conservative, as I did not even include people living in suburbs. 50L is old corporation limit ending at Velachery, Thriuvanmyur. Including suburbs it is close to 1C. I am sure there are some surburban guys (non-IT) also make good money.

    My NRI number is also very conservative. In Middle East itself there are 1L people with 20L income looking to buy Apt in Chennai. Singapore is another 20K atleast, US is 40-50K, Chennai visa center is the busiest in the world. There are 40-50K IT people going every year. UK/Eurpoe/Aus/Canada has siginifncant Chennai based people or people looking to put money in Chennai. My NRI number of 1L is nothing, it could be closer to 2-2.5L easily or even more.

    As I said my time period is also conservative, people buy 1 property every 5-6 years than 10 years I took. But lets keep 10 yrs as window. That makes 10% of propective buyers finish a deal every year.

    So 10-20K Apt absorbption is nothing it is bare basic, not oversupply EVERY YEAR.

    Coming to flipping, many older generation people made wealth becasue they never sell property. They buy one after another. So why will that change significantly.

    Also what is affordable 5 years ago is different today. 25L might be median price of Apt in 2007 for middle class. Now 50L is median price, for a 2-bhk in city outskirts or 3bhk in extended suburbs. This will keep on increasing.


    Update -

    What will bring down prices?
    Answer is not FSI.

    Good Land Acquisition Bill. Govt should start acquiring land (like for SEZ) and auction it off to residential developers and mandate them to build Apts within 5 years. Lot of land is lying around barren everwhere in the suburbs. Apts help end user more, by providing housing for first time buyers and cheap rentals subsidized by investors.

    Increase property taxes to very high levels for vacant lands (1-2% of land value) and provide refund during tax time for middle class people. Make investors and NRIs pay. Increase Stamp Duty for transaction to 15%, for second property buyers.
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  • It is harder and harder to get 3 BHK in suburbs for 50 lakhs. Budget housing developers these days are not selling 3 BHKs anymore (Eg, VGN Tranquil).
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  • Originally Posted by k11


    Update -

    What will bring down prices?
    Answer is not FSI.

    Good Land Acquisition Bill. Govt should start acquiring land (like for SEZ) and auction it off to residential developers and mandate them to build Apts within 5 years. Lot of land is lying around barren everwhere in the suburbs. Apts help end user more, by providing housing for first time buyers and cheap rentals subsidized by investors.

    Increase property taxes to very high levels for vacant lands (1-2% of land value) and provide refund during tax time for middle class people. Make investors and NRIs pay. Increase Stamp Duty for transaction to 15%, for second property buyers.


    K11 the very politicians and their influencing lobby will never allow this as they hold largest land banks than any one else
    Just the increase of GV is causing so much heart burn, but this is certainly wishful thinking,
    Relaxing FSI is a direct money making proposition both from tax base and from kickback so its most likely to happen
    regardless of whether its right thing or not but it is the pragmatic way
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