To answer many peoples question:

How can Indian RE prices be justified? Is it real growth?

The answer is no, It is not inflation adjusted or Constant rupee adjusted.

Major part of Indian RE prices growth can only be justified by Inflation coupled with INR devaluation.

Who are affected by It?

Indian residences who are not exposed to RE or other Inflation linked investments.

Like it or not that is the fact. If India is your country – you have to have that RE exposure or else Inflation & INR will ensure everything you have is depleted.
……………………………………………………………………………………
Don’t be surprised when you hear down the track 50K per Sqft in Chennai or 10K for a blue chip share or people getting paid 5 lakh p/m.

Indian Inflation (justified by INR valuation, population growth & economic growth) will ensure that will happen in your working life.

1 USD was 7 Rs in 1980 that is now 557% more - add inflation to it 557% + Actual growth – the 557% would look very small.

That is Rs 7 in 1980 bought more than what Rs 46 would buy today due to Inflation. I remember weekend Taj Coramandel Buffet dinner at Rs 50 p/p in late 80s now? At least a 1000% more at least Rs 500 )

Currency 1997 2000 2004 2009 Today Gain in%

US Dollar 38.44 44.95 45.34 46.08 = 20%

Canadian 26.00 30.28 34.91 44.12 = 70%

Euro 44.40 41.52 56.38 63.43 = 43%

Pound 55.38 68.11 83.08 72.74= 31%

Swiss Frank 28.71 26.65 36.53 43.23= 51%

Aus Dollar 27.76 26.15 33.40 41.54 = 50%

Japanese Yen 0.3261 0.4171 0.4194 0.511= 57%

Singapore Dollar 25.15 26.07 26.83 32.83 = 31%


** Note:

Why is USDs performance against INR so out of wack?

1. Officially, the INR has a market determined exchange rate after 1991 (Not pegged anymore). However, the RBI trades actively in the USD/INR currency market to impact and control INR value. Thus, the currency regime in place for the INR with respect to the USD is a de facto controlled exchange rate. This is called a dirty or managed float. Other rates such as the EUR/INR, INR/JPY or INR/AUD have volatilities that are typical of floating exchange rates (market controlled).

2. USD was trading close to Rs 50 in Oct 2008, USD is still reeling from the impact of GFC. It is quite possible for USD to raise well back to over RS50 when things settle down

History of government induced devaluation

Since its Independence in 1947, India has faced two major financial crises and two consequent government induced devaluations of the rupee:

In 1966:

Due to large budget deficits, drought there was a sharp rise in prices due to inflation.

To finance the large budget deficit Indian Government issued large bonds to the RBI, which increased the money supply, leading to inflation followed by devaluation of INR.

In 1991- Indian Economic Crisis:

India started having Bop problems since 1985, and by the end of 1990, it was in a serious crisis. The government was close to default; India could barely finance three weeks worth of imports. India had to airlift gold to pledge it with IMF for a loan.
The government decided to devalue the rupee following high inflation. Due to the devaluation the INR fell from 17.50 per USD in 1991 to 45 per USD in 1992.


In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies

On both cases inflation had caused Indian prices to become much higher than world prices – Therefore devaluation was an effective tool to “justify” the uncontrolled inflation.



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  • Is Taj Coromandel buffet yet Rs 500 per person? Sounds you are out of place!
    Inbetween 1991 and 92 rupee did not jump from 17 to 45 a dollar. Your faithfully has travelled extensively during this period and I can tell you that even in 1994 the rupee was just 33 to a dollar and in 1998 it oscillated in the 40s.
    Get your facts right buddy!
    CommentQuote
  • My source “Wikipedia 1991 Indian economic Crisis” Quoted (You can verify)

    “Due to the currency devaluation the Indian Rupee fell from 17.50 per dollar in 1991 to 45 per dollar in 1992”

    That is incorrect. I should have have double checked it before pasting it.

    Thanks for Nats to point that out.

    The correction is as below:
    Chronology of India’s exchange rate policies
    6 June, 1966: Rupee is devalued, Rs 4.76 = $1, after devaluation, Rs 7.50 = $1 (57.5%)
    August 1971: Rupee pegged to gold/dollar, international financial crisis
    20 December, 1971: Rupee is pegged to pound sterling again
    1971-1979: The Rupee is overvalued due to India’s policy of import substitution
    23 June, 1972: UK floats pound, India maintains fixed exchange rate with pound
    1975: India links rupee with basket of currencies of major trading partners. Although the basket
    is periodically altered, the link is maintained until the 1991 devaluation.
    July 1991: Rupee devalued by 18-19 %
    March 1992: Dual exchange rate, LERMS, Liberalised Exchange Rate Management System
    March 1993: Unified exchange rate: $1 = Rs 31. 37
    1993/1994: Rupee is made freely convertible for trading, but not for investment purposes


    Yes Taj coramandel “Anisie” Coffee shop does have a special Buffet for Rs 500 (albeit more like a brunch)

    Refer
    ="http://chennaithisweekend.com/eating-out-buffet-information-food-festivals-good-eat-outs-for-the-week"]http://chennaithisweekend.com/eating-out-buffet-information-food-festivals-good-eat-outs-for-the-week

    I know the cheapest “standard” Lunch or Dinner buffet will be over Rs2000.

    In case of Buffet at Taj Coramendal being at least Rs500 – the key is “at least”.

    To be conservative I quoted the cheapest available buffet - which still is a 1000% more that what a full week end dinner buffet was costing in the late 80’s.

    If I factor in Rs2,000 (Which is more realistic for a speciality restaurant dinner) the inflation on that would be whopping 3,900% Inflation.

    or

    Say Rs 1000 (say coffee shop Lunch) the inflation would be 1900%

    Take your pick. You can make many models and still find out the Inflation is huge.

    Guys what is your opinion on the mind boggling historical inflation & Currency devaluation issue.

    I would like to hear your experience and views on Indian Inflation and Currency Value and its Impact on property prices.
    CommentQuote
  • Economist ,

    Thanks for your time.


    Whenever indian government was in big trouble , they devaluated the currency.Now the whole world is in trouble.I think we can not campare the 1960/1990 issue with GFC.


    Can you please explain how this devaluation happen? by printing more money ? or is the govt going to announce that they are going to devaluate the INR?How exactly it happens?

    Major part of Indian RE prices growth can only be justified by Inflation coupled with INR devaluation

    I can not accept this fact becas If you look at the history , we have never seen such a RE boom like what we saw in 2004 - 2007.The boom which fueled by low interest rate has to bust and go to the affordable level, then whatever the RE price growth we are going to see in future can justified by inflation.I am not telling we are going to see 80% fall,but it has to come to the affordable level.


    I remember , 1 ground of plot in AGS colony Velachery went for 6 lakhs in 2003 and it is 70 Lakhs now.DO you think is this 70 Lakhs per ground can justified by Inflation? I understand Salaries also went up during 2004-2008 period.But tell me who can afford this 70 lakhs per ground today?
    CommentQuote
  • Hi Srinidhi

    Whenever indian government was in big trouble , they devaluated the currency.Now the whole world is in trouble.I think we can not campare the 1960/1990 issue with GFC.


    No one is relating GFC with “Chronic” Indian Inflation and currency devaluation.

    Poor management of Inflation is hallmark of Indian Government (No mater if there is a GFC or not) In 1991 or 1966 the problem was specific to India resulting in poor inflation and forex management.

    Can you please explain how this devaluation happen?


    Prior to 91/92 :INR value was artificially controlled by Gov. They devalued by changing (fixing) the benchmark rate.

    After 92 : After INR float the RBI influence the INR/USD value by selling/Buying (huge quantity) rupee in the currency market. If the want INR value to go down they would flood the currency market with INR to buy large quantity of USD for the reserve.

    Low INR also helps exports and tourism, justify high prices and wage cost however imported goods cost go up (local products will be cheaper when compared to imported that will help local industries).

    I can not accept this fact becas If you look at the history , we have never seen such a RE boom like what we saw in 2004 - 2007.

    The price rise in 2004 to 07 had many reasons.

    One such reason was : The price pressure has been building up for many years prior to that.

    Indian RE market tends to be flat (or minimal growth) for many years and then suddenly spurt very high in a short term.

    I strongly believe (Thru personal experience) Chennai RE was mostly flat from mid 90’s until 2005 then there was this big leap.

    I will not be surprised if the market is flat for another 4-5 years before another big spurt.

    The problem is when that spurt/leap happens people are caught off guard – good properties will be scares, mad rush, mistakes happen and things get nastier.

    It is always good to invest when the market is flat that way one gets choice and good property for a decent price after that just sit for a few years and wait for the spurt.


    I remember, 1 ground of plot in AGS colony Velachery went for 6 lakhs in 2003 and it is 70 Lakhs now. But tell me who can afford this 70 lakhs per ground today?


    should move to another outer suburb that is affordable and watch it become like Velachery or Thambaram in 10 to 12 yrs – The cycle continues.

    I went to Velachry (behind Raj Bhavan) in 1995 all I could see was slums huts as far as I could see,My car was stuck in muddy road & rain water puddle. I cursed my self for going to velachery.
    See now, it is a different place.

    BTW why didn’t you buy at AGS colony for 6L (many would have told you the price is high and it is not worth it in 2003)

    Human nature - There was never a time when some one says “the property price is cheap or affordable”

    In 1999 when I paid 4L per G in Mugaper I was called mad for paying so much in the middle of nowhere.

    When my Father paid 1.2L for 2.5ground in Annanagar in 1979 my uncle called him a fool for paying such a huge amount (mind boggling amount those days) in the middle of bushes where there was no civilization.

    RE will always look expensive and unaffordable.

    Inflation and pay rise will slowly follow and once again when you think RE price looks affordable it will spurt again – That has been always the case.
    CommentQuote
  • Excluding electronic & Auto all other core industry such as service (Including health),Commodities (Agri & resources),energy, wages, rent/Accommodation all are consistently going up on the long term.
    CommentQuote
  • Hi Economist.

    First, I agree 100% that some RE, including at least the roof over your own head, is a total must to guard against inflation.

    I differ from you in that I do not think it is currency devaluation which is the main cause of inflation, although it contributed in the past. After 1991, Rupee is in a reasonable free float with restrictions on inflow and outflow which are actually good and beneficial.

    India's currency management and reserve banking in the last 15-20 years is impeccable - I think they are both the best in the world, from what we have seen over the last decade. Much better than many free float countries.

    There are 3 causes of inflation. First, the most basic is supply demand mismatch. If a thing is scarce, it costs more and as scarcity continues, price keeps rising. Scarcity can be genuine or because of hoarding/black marketing.

    Second is monetary policy - an increase in money supply.

    Third is competitive disadvantage - which is what results in currency devaluation.

    As regards RE, increase in price of RE is in fact nothing but inflation. It affects everybody including you and me.

    Re price inflation has been traditional in India because of scarcity factor due to misgovernance reasons. There is 700 million acres of land in India, around 1 acre for every 2 people. Around 250 million acres of this is cultivable.

    People cannot build homes in this land because there are no roads - you need a helicopter (or walk/bullock cart as actually practiced) to reach 90% of this land. Cost of land in countryside reflects acricultural output. Average is 50,000 per acre (price of 1 laptop). Highest possible yield of agriculture, as practiced in India is 2 tons of cereal per acre = 40,000 Rs at 20 Rs per kilo. Not counting input costs. Usual agricultural yield without irrigation is around 10,000 Rs per acre. Which is peanuts.

    So the value of land is determined entirely by means of roads - if there is road, price is in crores. If there is no road, price is in peanuts.

    Second we have bad laws. There are laws in every state which restrict building on agricutural land. There are urban land cieling acts which prevent easy manufacturing of large scale apartments. Tenancy laws are tilted against landlords, who prefer to lock up the flat than rent it (more in Delhi).

    All of these create a scarcity of housing, which has the effect of making housing expensive.

    Tenency laws paradoxically prevent people from getting cheap rental houses. Otherwise massive tenaments can be erected by companies and rent out 1000 sf flats at 1000 Rs per month (thats all it actually costs). But our govt is wretched and perverse and prevents this from happening by keeping archaic tenancy laws.

    As a result, people pay the same 1000Rs rent for living in a slum in Dharavi. Actually much more.

    Govt gains in multiple ways from this scarcity. Politicians finance and are financed by crooked builders. High value RE is a good hiding place for black money as well as corruption money. Congress traditionally has juggi jhopri vote bank - so they try to keep people poor. Their modus operandi is - you have to vote for me otherwise you lose even your juggi!!!!! Nobody publicises the fact that Congress laws are what created the juggi in the first place.

    In any case, after 60 years of mismanagement, the scarcity of flats remains. At the pace in which govt is creating roads, there is going to be flat scarcity for my lifetime at least.

    But my fear for the near future is that multiple factors are converging to cause inflation all together.

    First, the RE scarcity has been magnified by recent prosperity - salaries are up and a lot of people are looking to buy. People in their 50s, 40s, 30s, and even 20s are all entering the RE market at the same time. Last time this happened in 2004-2007, we had RE hyperinflation. Flat prices tripled in 3 years.

    As long as our economy does well, this trend will continue.

    Second, there has been good monetary action by RBI but exceptionally incompetent fiscal policy by the finance ministry. This includes NREGA, 6th pay commission and loan waivers. We have overspent govt funds crazily and this has caused an increase in money supply which makes inflation inevitable. This will be reflected in RE price. The govt servants and puclic sector undertakings have all got salary rise and arrears which will inevitably go to RE. It will also stoke inflation of food - where also poor govt policy has caused scarcity by destroying agriculture (17% of GDP last I heard).

    Third, monetary policy of the whole world is loose and over 5 years is bound to increase raw material prices for oil and base metals, both will impact RE constructin cost.

    Finally, currency movements in both directions will cause RE price inflation. If Rupee strengthens, then it means our economy is doing well and there will be more people quieing up for flats. If Rupee weakens, raw material costs will go up making flats more expensive to build. At the same time s o f t w a r e outsourcers will get a competitive advantage and will see pay rises - increasing demand for RE.

    There is one other thing - which many people who talk demand and supply do not understand at all.

    In USA there are 18 million more dwelling units than there are households. 18 million vacant homes. But year on year the number of households is increasing because of immigration and more children by christian rightwingers.

    In Europe, number of dwelling units equals number of households, with a mild excess which varies from country to country. There is a decline in number of households year on year due to declining population.

    In Japan, number of dwelling units equals number of households. But number of households is dropping precipitously due to massive aging and population decline.

    In China, number of dwelling units which in India will be called "pucca" exeeds number of households (YES!!!!!!). Everybody has a home, a TV, a cycle, a washing machine. Most current dwelling units are more than adequate by Indian standards. New housing is aspiratinal i.e. a luxury, as people earn more and want to better their lifestyle. Population is plateauing and is likely to face a 50 year slow decline followed by a precipitous drop much worse than Japan.

    Now you all know what India is. The vaaaaaaaaaaast majority live in tents/juggi/footpath/village huts without electricity.

    A small percentage of this mass moves out of poverty every year. This will create a demand supply mismatch for the next 100 years. If India shows even 5% growth sustained for the next 20 years, there will probably be a 50% mismatch over this period i.e. there will be only half as many dwelling units as compared to households with income enough to buy/rent a flat.

    Shortages and RE price inflation is inevitable.

    Better buy now. RE price has only one way to go and that is up.

    Current flattening is a buying opportunity, before the relentless RE inflation continues.

    I do not anticipate good road building by Indian governments for at least 15 years. The only thing which can prevent RE inflation is road building. If govt builds roads, then it will dull the RE price inflation somewhat.

    Since political parties are the main beneficiaries of RE price inflation, including election funding, it is in their self interest to misgovern India.
    CommentQuote
  • Originally Posted by Srinidhi
    Economist ,

    Thanks for your time.


    Whenever indian government was in big trouble , they devaluated the currency.Now the whole world is in trouble.I think we can not campare the 1960/1990 issue with GFC.


    Can you please explain how this devaluation happen? by printing more money ? or is the govt going to announce that they are going to devaluate the INR?How exactly it happens?

    Major part of Indian RE prices growth can only be justified by Inflation coupled with INR devaluation

    I can not accept this fact becas If you look at the history , we have never seen such a RE boom like what we saw in 2004 - 2007.The boom which fueled by low interest rate has to bust and go to the affordable level, then whatever the RE price growth we are going to see in future can justified by inflation.I am not telling we are going to see 80% fall,but it has to come to the affordable level.


    I remember , 1 ground of plot in AGS colony Velachery went for 6 lakhs in 2003 and it is 70 Lakhs now.DO you think is this 70 Lakhs per ground can justified by Inflation? I understand Salaries also went up during 2004-2008 period.But tell me who can afford this 70 lakhs per ground today?

    I am not sure how long you are alive and sane (meaning your age and age when you can think, say when you were 18-20+ atleast if you have brains and an economic thinking). Cutting the crap, RE boom in 80s was as big if not more. So for the kiddo of today what he sees is the ONLY truth but as you grow you find that it is ONE of the truths at best. In 80s a plot we bought for 60K in Nandanam was resold by my family for 180K triple in 1.5 years flat and we used that to buy a house in Tiruvanmiyur. Well that property yet exists and has not gone up so suddenly. In reality yours/many folks here, their understanding of RE is atbest that of a novice and NO MORE.
    RE as I have shown by personal examples of land has grown over periods of time at 25%. Now this does not mean every year it is 25%. I have had properties which did not even grow 5% for first 10 years but later averaged 20%. In other words RE is not a stupid straight line curve to please stupid youngsters of today. RE is a big game, not for kiddos.
    I know kiddos who bought flats in 2005 and sold for 50% to 80% profit in 2007-8. I can bet they are going to lose that gain in the next bet they might do but when exactly I cant state.
    In other words, RE trading is stupid. RE investment is good always especially in a growing country like ours. As for the country even in the future when YOUR SW JOBS DISAPPEAR RE will yet be growing in Rupee terms, may not be in International terms.
    CommentQuote
  • Originally Posted by Economist
    My source “Wikipedia 1991 Indian economic Crisis” Quoted (You can verify)

    “Due to the currency devaluation the Indian Rupee fell from 17.50 per dollar in 1991 to 45 per dollar in 1992”

    That is incorrect. I should have have double checked it before pasting it.

    Thanks for Nats to point that out.

    The correction is as below:
    Chronology of India’s exchange rate policies
    6 June, 1966: Rupee is devalued, Rs 4.76 = $1, after devaluation, Rs 7.50 = $1 (57.5%)
    August 1971: Rupee pegged to gold/dollar, international financial crisis
    20 December, 1971: Rupee is pegged to pound sterling again
    1971-1979: The Rupee is overvalued due to India’s policy of import substitution
    23 June, 1972: UK floats pound, India maintains fixed exchange rate with pound
    1975: India links rupee with basket of currencies of major trading partners. Although the basket
    is periodically altered, the link is maintained until the 1991 devaluation.
    July 1991: Rupee devalued by 18-19 %
    March 1992: Dual exchange rate, LERMS, Liberalised Exchange Rate Management System
    March 1993: Unified exchange rate: $1 = Rs 31. 37
    1993/1994: Rupee is made freely convertible for trading, but not for investment purposes


    Yes Taj coramandel “Anisie” Coffee shop does have a special Buffet for Rs 500 (albeit more like a brunch)

    Refer
    ="http://chennaithisweekend.com/eating-out-buffet-information-food-festivals-good-eat-outs-for-the-week"]http://chennaithisweekend.com/eating-out-buffet-information-food-festivals-good-eat-outs-for-the-week

    I know the cheapest “standard” Lunch or Dinner buffet will be over Rs2000.

    In case of Buffet at Taj Coramendal being at least Rs500 – the key is “at least”.

    To be conservative I quoted the cheapest available buffet - which still is a 1000% more that what a full week end dinner buffet was costing in the late 80’s.

    If I factor in Rs2,000 (Which is more realistic for a speciality restaurant dinner) the inflation on that would be whopping 3,900% Inflation.

    or

    Say Rs 1000 (say coffee shop Lunch) the inflation would be 1900%

    Take your pick. You can make many models and still find out the Inflation is huge.

    Guys what is your opinion on the mind boggling historical inflation & Currency devaluation issue.

    I would like to hear your experience and views on Indian Inflation and Currency Value and its Impact on property prices.
    Just was pointing to some disparity. No real cribs on your views as such. Take it easy buddy.
    Just was pointing to some disparity. No real cribs on your views as such. Take it easy buddy.
    Just was pointing to some disparity. No real cribs on your views as such. Take it easy buddy.
    Just was pointing to some disparity. No real cribs on your views as such. Take it easy buddy.
    CommentQuote
  • Guys thanks for all your contributions and views on property Inflation in India
    CommentQuote
  • I think this thread has some relevance now with what is happening with Indian economy now.



    Note: Please ignore serial offender Natraj (Almighty, ZeeEnn avatars) Do not get offended by his posts. Those were the days he was active after he was banned under few names.
    CommentQuote
  • From INR 45 = 1 USD in 2011, we have come to INR 60 = 1 USD in 2013.. that is in less than 24 months, some 33% devaluation of our currency..

    The implications are HUGE, HUGE ..
    CommentQuote
  • I agree OP that Inflation is eating up INR. RE is very important asset to own in India. However the reason for inflation is not because of population growth, INR devaluation or economic growth. It is because of Corruption. Corruption is a way of life here. That is the reason inflation is never controllled in India.

    One has to live in here to understand the ground reality and it is difficult to imagine the issue while staying away from India.

    Anyway best bet to survive in India is having RE, some Gold, some Equity exposure and some fixed income. RE is most difficult asset class in India as it takes years of pain to find right place to buy and live in. Though renting looks cheaper it comes with lot of pain and it is not worth it!
    CommentQuote
  • Originally Posted by ramki830
    From INR 45 = 1 USD in 2011, we have come to INR 60 = 1 USD in 2013.. that is in less than 24 months, some 33% devaluation of our currency..

    The implications are HUGE, HUGE ..


    Ramki
    check the 10 years charts and 5 years charts you may get different perspective, next 5 years could be interesting
    the lifeline removal will show how the market here is going to witstand the shock of not receiving 85B a month free cash flow
    in comparison India's net imports a month is only 45B including oil and gold
    CommentQuote
  • Yeah, good point. If FED stops printing the 85 billion dollars every month, i feel USD will have better scope of increment due to demand for dollars based on our import bills.

    Few things which might tilt towards INR,

    Good reforms (only after next government is elected)
    Lower CAD
    Good FII inflow into India
    CommentQuote
  • Originally Posted by VenkatRE
    Yeah, good point. If FED stops printing the 85 billion dollars every month, i feel USD will have better scope of increment due to demand for dollars based on our import bills.

    Few things which might tilt towards INR,

    Good reforms (only after next government is elected)
    Lower CAD
    Good FII inflow into India

    Apart from these I also think financial literacy among people have to increase. I have seen poor understanding of finance among many folks who donot understand anything about money and just go blindly with there investment decisions. if this financial literacy improves people will have savings in instruments which will help economy to grow thereby strengthening rupee.
    CommentQuote