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Mumbai Property Prices May Crash : Ambit - Is it real?

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Mumbai Property Prices May Crash : Ambit - Is it real?

Last updated: July 24 2015
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  • Mumbai Property Prices May Crash : Ambit - Is it real?

    Im planning to buy my first house here https://housing.com/in/buy/projects/...n-andheri-east

    But I just came across a news Mumbai property prices may crash as much as 50%: Ambit - Moneycontrol.com

    So need your views on should buy this home now or wait for some time to price to go down.

    My Budget is 65L + 9L for registration.
    Last edited July 22 2015, 11:32 AM.
  • #2

    #2

    Re : Mumbai Property Prices May Crash : Ambit - Is it real?

    50% is absurd. May be 10-20% .. but may remain stagnant or muted appreciation for a longer time (may be 2-3 yrs or longer). If you can wait, you better try next year, the status of the building will be better (as construction status will be more prominent). Else try to negotiate hard for a good discount or freebie like Parking, Stamp Duty etc. Rates seems reasonable, but builder seems is not one of the most reputed one and carries a risk as in such bear markets many builders may abandon projects halfway. Try to figure out whether the builder has taken loan against the plot/ property?

    P.S.- hope all other papers from the builder is in order.

    Comment

    • #3

      #3

      Re : Mumbai Property Prices May Crash : Ambit - Is it real?

      50 percent is wishful thinking.the market has seen stagnation for the last 12-16 months and think then trend can last 1-2 years but definitely don't think the housing prices can crash I have read the ambit report and feel that most of the stats are correct they haven't taken into account the fact that Mumbai is not just any city comparing it to Delhi and banglore is not justifiable.

      Also the fact that even though Mumbai as a whole hasn't seen a huge price rise the truth is micro markets in Mumbai hare still seeing 10-12 percent increase in prices ex ghatkopar, chandivali, kanjurmarg. So the generalization that prices will drop can't be taken at face value, prices might drop in Navi Mumbai or Vasai but saying that bandra or lower Parel is going to as this kind of drop is just plain dumb I feel.

      In your case I would suggest doing what manzb as recommended. After all Mumbai only has finite amount of land and don't see the prices going down for such a rare commodity

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      • #4

        #4

        Re : Mumbai Property Prices May Crash : Ambit - Is it real?

        Boss.. you have the audacity to say that Navi Mumbai prices can correct. I think as per few IREF members, Navi Mumbai can only go up (up, up and away). .. I feel happy, and always hope that their prophecies comes true as I own a house in Navi Mumbai.

        Going to the OP's suggested property, if it would have been in the developing nodes of Navi Mumbai, I can safely say that it would have costed no less than 3 Cr +, considering that it is closer to a running metro and a running airport. In Navi Mumbai builders will be asking for premium even for few considered projects (not on ground) like Airport, MTHL, SEZ or what's not. For example a 2 BHK in something called Sai World City at a place far away from Panvel town will cost you almost the same amount, this guy is asking at Andheri (E).

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        • #5

          #5

          Re : Mumbai Property Prices May Crash : Ambit - Is it real?

          On the edge: Is Indian real estate heading for a 50% crash in prices?


          We all know that real estate in India is terribly expensive and is now selling at prices making it practically unaffordable for almost everybody who wants to buy a home to live in. But how expensive is expensive? This is an important question that needs to be answered.

          One way of looking at this problem is through the rental yield available on houses at any point of time. Rental yield is the annual return that can be earned by renting out a house. The number is obtained by dividing the annual rent of the house by its market price.

          And what is the rental yield in India? As Ashwinder Raj Singh is CEO - Residential Services of JLL India points out in a June 2015 column in The Indian Express: "Rental yields vary across the globe, but an average of 2 per cent of rental yield is considered a good deal for residential properties in India."

          Singh goes on to write: "In India, the cities which currently offer a higher rental yield are Mumbai, Pune, NCR-Delhi, Bengaluru, Kolkata, Chennai, Hyderabad, Ahmedabad. All these cities offer a rental yield of 2 per cent and above, and you can be assured that the average is not going down anytime soon. Investing in these cities will offer you the maximum returns on investment in properties bought for generating rental income."

          Why would anyone invest for a return of 2 percent is a question that only perhaps Singh can answer? And at 2 percent the rental yield is already very low. We will leave this argument for another day.

          Hence, we have an expert telling us that an average rental yield of 2 percent is considered good in India at this point of time. But is it enough? In a recent research report titled Real Estate: The Unwind and its Side Effects analysts Saurabh Mukherjea and Sumit Shekhar of Ambit provide the answer.

          As they write: "In a fairly-priced real estate market, the rental yield tends to be somewhere close to the cost of borrowing. Instead, Mumbai has a rental yield of close to 2% (this is gross of tax and maintenance charges) whilst the lending rate hovers around 10%. The difference between lending rates and rental yields is one of the highest."

          What Mukherjea and Shekhar are essentially saying is that the rental yields in India are totally out of whack.



          As the above chart (Exhibit 11) shows us, even China which has had a huge real estate bubble going has a rental yield better than that of India. In fact as the next chart (Exhibit 12) shows the difference between the interest rate at which money can be borrowed and the rental yield is one of the highest in the world, in India. At this point of time a home loan can be borrowed at 10 percent whereas the rental yield is 2 percent, a difference of 8 percent.



          What does this tell us? The rental yield as explained above has two inputs: the annual rent and the market price of the house. A rental yield of 2 percent means that the market price of homes in India has risen at a much faster rate than the rents.

          And why is this the case? As Mukhejea and Shekhar write: "Rental yields in property markets in India have remained extremely low as compared to its other Asian peers thereby pointing to the over-valuation of this asset class mainly because it can absorb black money."

          The rental yield cannot continue to remain out of whack. For it to come to the right level, the rents need to rise or the market prices of homes need to fall. Given the surfeit of homes available right now, it is highly unlikely that rents will rise. The chances of property prices falling are significantly higher.

          As the Firstpost editor R Jagannathan wrote in a column in November 2014: "In India, borrowing costs for home loans are around 10.5-11 percent currently - when rental yields are a fourth of that level. If rental yields in India have to catch up with those in New York and London, Indian property rates have to fall by a third to a half."

          Mukherjea and Shekhar of Ambit make the same point when the say: "Even if one assumes that buyers are willing to live with only 5% rental yields (as they might have an extremely bullish view of capital gains arising from real estate in India), this would imply halving of real estate prices in Mumbai." What is true about Mumbai is also true about other parts of the country.

          Let me explain the maths through an example. Let's say an individual buys a home for Rs 50 lakh. The rent that he can earn on this is Rs 1 lakh, meaning a rental yield of 2 percent (Rs 1 lakh expressed as a percentage of Rs 50 lakh).

          For the rental yield to rise to 5 percent, what has to happen? One option is that the rent needs to rise to Rs 2.5 lakh. This would mean a rental yield of 5 percent (Rs 2.5 lakh expressed as a percentage of Rs 50 lakh). But as I explained above, the chances of rents going up at this dramatic rate are simply not there.

          Hence, what needs to happen for the rental yield to be around 5 percent? Market price of homes needs to fall. A rent of Rs 1 lakh would lead to a rental yield of 5 percent, if the market price of the home is Rs 20 lakh (Rs 1 lakh expressed as a percentage of Rs 20 lakh). This means that the price of the home needs to fall from Rs 50 lakh to Rs 20 lakh or a fall of 60 percent. At a 50 percent fall, for a rental yield of 5 percent, the rent needs to rise to Rs 1.25 lakh (Rs 1.25 lakh expressed as a percentage of Rs 25 lakh).

          This is the point that Mukherjea and Shekhar are trying to make.

          While the maths looks all fine, the question is will this happen and how soon will this happen? The only way this will happen is if the black money going into real estate slows down to a trickle so that only genuine buyers are left in the market. This is easier said than done. The Modi government has had some focus on black money and let's hope that continues and improves in the days to come, with the government focussing on domestic black money as well. A point worth repeating here is that ultimately almost all the black money is domestic given that it is generated within the country.

          Also, it is worth remembering here that real estate prices don't fall as rapidly as stock markets do. So, the right answer here is that real estate prices will fall and they will fall dramatically, but only over a period of time.

          Stay tuned. The massacre has just started.

          (Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

          On the edge: Is Indian real estate heading for a 50% crash in prices?

          Property prices are completely out of whack with interest rates and rental yields. We will see depressed prices for the next 7-8 years (like the downturn we had in 1997-2003).

          There is a limit to how long developers will cling on to unsold inventory. Their lenders will force them to get rid of their inventory to service their loans. Furthermore, I also hear that banks are getting more conservative and reluctant to fund new projects - this leaves developers to partly fund their new projects from their own cash-flows - so force them to sell their bloated inventory. I think a 50% crash is a distinct possibility.

          Comment

          • #6

            #6

            Re : Mumbai Property Prices May Crash : Ambit - Is it real?

            Originally posted by Kharkar View Post
            Property prices are completely out of whack with interest rates and rental yields. We will see depressed prices for the next 7-8 years (like the downturn we had in 1997-2003).

            There is a limit to how long developers will cling on to unsold inventory. Their lenders will force them to get rid of their inventory to service their loans. Furthermore, I also hear that banks are getting more conservative and reluctant to fund new projects - this leaves developers to partly fund their new projects from their own cash-flows - so force them to sell their bloated inventory. I think a 50% crash is a distinct possibility.
            Developers found a new way to counter this problem and cash flows issue. They calls it pre-launch, to leech the gullible customers, showing a benefit of 5-10%. In the last one year or so there are so many pre-launches that now it is very common for all the builders to start a project with pre-launch. Customers falls prey despite the fact that there is no approvals in place and no firm commitments for delivery.
            Last edited July 22 2015, 01:47 PM.

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            • #7

              #7

              Re : Mumbai Property Prices May Crash : Ambit - Is it real?

              Originally posted by manzb View Post
              Developers found a new way to counter this problem and cash flows issue. They calls it pre-launch.
              Even so, there is only so much that they can raise by means of a pre-launch/early bird offer - most certainly won't meet their cash flow requirements. Besides, banks are also very unlikely to provide housing loans to buy into such schemes.

              Comment

              • #8

                #8

                Re : Mumbai Property Prices May Crash : Ambit - Is it real?

                Originally posted by Kharkar View Post
                Even so, there is only so much that they can raise by means of a pre-launch/early bird offer - most certainly won't meet their cash flow requirements. Besides, banks are also very unlikely to provide housing loans to buy into such schemes.
                Oho.. they are in their fool's world and still believe that bull market is returning next qtr, so that they need to carry on with this situation only for another qtr or so. They will not act as per the ground reality till they gets whatever opportunity to manage their shows.

                Once the options runs out, they will eventually accept the fact, till then running the shows at the expense of customers.

                FYI, Orbit choose lenders to take over (Orbit residency Park) rather than discounting the property with lower profit for a speedy sale and thus avoiding the showdown. Normally bank takes lot of time to take over property and auction (in Orbit's case almost 3 yrs).

                Expect a similar fate with Lodha with more than 12,000 Cr of debt, sooner or later.

                Comment

                • #9

                  #9

                  Re : Mumbai Property Prices May Crash : Ambit - Is it real?

                  Originally posted by Antim123 View Post
                  but saying that bandra or lower Parel is going to as this kind of drop is just plain dumb I feel.

                  In your case I would suggest doing what manzb as recommended. After all Mumbai only has finite amount of land and don't see the prices going down for such a rare commodity
                  Have you been in the market during an actual downturn or witnessed a crash? The price of my flat in Khar dropped by less than half within a span of 3-4 years during the 1997-2003 crash and down cycle. In 1995-96, I was getting offers of Rs 45-48+ lacs, by 1998 it was 30 lacs and by 2003 it was down to 25 lacs - thankfully, I didn't manage to sell it).

                  So, saying prices will never see that kind of fall in so called prime suburbs is incorrect. At best, there may be no deals at all, since sellers rigidly stick to their high asking prices.

                  Comment

                  • #10

                    #10

                    Re : Mumbai Property Prices May Crash : Ambit - Is it real?

                    Originally posted by manzb View Post
                    Oho.. they are in their fool's world and still believe that bull market is returning next qtr, so that they need to carry on with this situation only for another qtr or so. They will not act as per the ground reality till they gets whatever opportunity to manage their shows.

                    Once the options runs out, they will eventually accept the fact, till then running the shows at the expense of customers.

                    FYI, Orbit choose lenders to take over (Orbit residency Park) rather than discounting the property with lower profit for a speedy sale and thus avoiding the showdown. Normally bank takes lot of time to take over property and auction (in Orbit's case almost 3 yrs).

                    Expect a similar fate with Lodha with more than 12,000 Cr of debt, sooner or later.
                    It is heard as grapevine that Lodha is well connected with current dispensation and lots of money from one prominent late maharashtrian politician's coffers has ended up in their kitty

                    Comment

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