Rising interest rates, tighter lending norms, poor sales--they all add up to an imminent slump in property prices

Property prices in major Indian cities, including Mumbai and New Delhi, are set to slump by as much as 30% in the next three-six months as rising interest rates and tighter lending norms have led to a sharp drop in demand for homes. "Softening in prices would begin in a month or two if sales continue to be low," said Adhidev Chattopadhyay, an analyst at Mumbai-based Edelweiss Securities Ltd. A Credit Suisse note on 19 January forecast that property sales in India may decline unless prices are cut 10-30%.

The Reserve Bank of India (RBI) has signalled borrowing costs will rise further after increasing interest rates seven times in the past year to curb price rise. It has also tightened lending norms for the purchase of property to rein in surging prices. Even as the supply of residences outstrips demand, property developers, who need to repay an estimated Rs14,000 crore to banks by the end of the financial year, are facing the spectre of loan defaults as dropping stock prices make it difficult for them to access equity markets, and banks tighten lending.

"A consensus is emerging that we are seeing the tip of a slowdown or a semblance of a bubble and the nervousness is evident on a pan-India level," said Amit Goenka, national director, capital transactions, Knight Frank India.

The Bombay Stock Exchange realty index, a measure of 15 property stocks, has dropped 26% in the last year, compared with a 17% rise in the benchmark Sen. The realty index has plunged 25% this year.

In November, RBI asked lenders not to loan more than 80% of the value of a property priced at more than Rs50 lakh. It also asked banks to increase the risk weightage of property loans of more than Rs75 lakh to 125%, making it more expensive to lend. Risk weightage assigns the minimum amount of capital that lenders have to maintain, as a percentage, depending on how risky a loan is.



"This was an additional factor along with the price rise which directly impacted investor sales in the higher end of the residential market," said Chattopadhyay.
"The loan-to-value ratio being capped at 80% effectively reduces the purchasing power of a homebuyer," analysts Aashiesh Agarwaal and Chattopaday wrote in a note to clients. "With a homebuyer having to cough up additional 5-10% equity for buying a house, he may have to delay his purchase decision, leading to a fall in incremental sale volumes."

The drop in residence sales has led to an increase of inventory in several cities. Mumbai has been the worst hit with about 88,000 unsold flats in the metropolitan region. About 25,000 of them are within the city limits of India's commercial capital, according to a survey of 2,400 housing projects in Mumbai, conducted by property researcher Liases Foras.

Recent home sales data suggest it may take as many as 22 months for the inventory to be cleared in cities such as Mumbai, Delhi-NCR (National Capital Region), Chennai and Hyderabad, said Pankaj Kapoor, chief executive of Liases Foras.

Residential sales tumbled 15% in Gurgaon, 20-25% in Greater Noida and Ghaziabad and almost 40% in Faridabad during the last two months of the past year, according to PropEquity Research.

Data from across India shows that only 15% of the home deals struck between April and September were at prices less than Rs2,500 per sq. ft, suggesting it is now difficult to buy even a 1,000 sq. ft house for less than Rs25 lakh in most cities. As a result, volumes have begun to slow and new bookings reported by major developers have been lower than expected, Credit Suisse said in their report.

"Builders have started negotiating across the table and are willing to cut prices by 10-15%, but prices need to fall further to become affordable," said Kapoor.

Some prospective buyers have now decided to delay their purchases until prices fall.

Vishal Jain, 35, has taken a break after six months of house-hunting every weekend. Jain, who runs his own optical lens business, wants to shift from his one-bedroom apartment in Ghatkopar, a Mumbai suburb, to a two-bedroom home in the Malad-Kandivali area, another suburban destination. He has a budget of Rs45-50 lakh.

"Even if I stretch my budget by another Rs10 lakh, there is nothing available other than properties in 25-year-old housing societies," Jain said. "So I can either move further north, towards Dahisar, or wait for another six months."

Indiabulls Real Estate Ltd, which is developing the "Bleu" project in central Mumbai at prices that are 15-20% lower than its earlier luxury projects, has also laid out simpler terms for its buyers to ensure sales.

A price correction will help propel volumes, said developers. Analysts predict a 15-20% correction in prices in NCR and rest of India, while "overheated" markets such as Mumbai and Ahmedabad would see a fall of 20% and above.

"If demand is low, we may correct prices," said Vikas Oberoi, managing director of Oberoi Realty Ltd. "We have corrected prices earlier and we will do it again."

In Hyderabad, the Telangana agitation has hurt both property prices and sales. In Bangalore, home to companies such as Sobha Developers Ltd and Prestige Estates Projects Ltd, sales have been stronger.

"You need to keep a price that will be accepted by the homebuyer," said J.C. Sharma, managing director at Sobha Developers. "India is growing and we know people can and are willing to spend now."

The decline in sales, however, has not slowed building activity. Construction in central Mumbai continues, with textile mills being torn down to make way for luxury housing and shopping projects.

An estimated $10 billion (Rs45,000 crore) of new housing projects are in the pipeline in the Lower Parel area of the city, with large developers such as Indiabulls, Peninsula Land Ltd, DLF Ltd and Lodha Developers Ltd in the fray to sell about 10 million sq. ft of luxury housing at an average price of Rs15,000-20,000 per sq. ft.

Knight Frank's Goenka said that despite sluggish sales of premium homes, residences that cost Rs20-40 lakh will find buyers.

Tightened bank lending, declining equity markets, private equity funds demanding steep returns and negligible property sales have compounded the trouble for property developers, said Pujit Aggarwal, managing director at real estate developer Orbit Corp. Ltd.

Indian real estate has always relied heavily on bank financing, with outstanding banking loans to the real estate sector having increased 33% in the past 21 months to over Rs1 trillion, according to Credit Suisse.

Analysts say the pressure is mounting on developers from all sides.

Hari Prakash Pandey, vice-president, finance and investor relations, Housing Development and Infrastructure Ltd, said that if the environment is hawkish--be it the government or financial authorities--decision-making is impacted, affecting business growth.

DLF, the nation's largest developer, said after its third-quarter earnings that it is banking on a series of new properties to generate cash flow and partly pare its Rs20,694 crore debt.

DLF may not meet its sales forecast of 12 million sq. ft by March, as about six of its new projects have been delayed, and due to price rises in recent months, said Angel Broking Ltd in a 1 February report.

To make problems worse, banks may further tighten lending to property developers after DB Realty Ltd and Unitech Ltd have been linked to ongoing investigations into the allocation of telecom spectrum. Lenders are turning down new loan proposals and may also take a close look at the proposed end use of loans that have already been sanctioned, but not yet disbursed to real estate companies.

"Investors want to know whether the money borrowed by developers for real estate purposes are being used for what it is actually meant or are being diverted elsewhere and they want to be doubly sure," said Rajiv Sahni, partner, real estate practice, Ernst and Young India.
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  • Originally Posted by mangoman2012
    Bubble is burst already...only thing is that it need to be acknowledged by the crowd...ask anybody who is in the business..and talk to them over a drink..he will tell a sorry tale to tell...

    Lot of quick rich guys are stuck and now not in a position to speak...sadly...but this is going to get ugly....

    There are lot of carrots shown...election, modi, budget...blah blah blah....but unfortunately nobody has a magic wand..

    btw, are you seeing the bank results? they are screwed man....and it is going to get very very very very very very ugly from here....


    I agree and according to me golden era for long term investors (5 years plus) has just started. Uglier it gets better is the opportunity for long term investor. I find it sort of interesting the properties are available at atleast 20 percent discount to what they were available 2 years ago which is infact 30 percent net down if you include inflation and people were more optimistic then. And now the same property is available 30 percent less and they are sad even if they are not invested.

    Great time to begin long term investing journey if one is an HNI investor.
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  • Originally Posted by ravika
    I agree and according to me golden era for long term investors (5 years plus) has just started. Uglier it gets better is the opportunity for long term investor. I find it sort of interesting the properties are available at atleast 20 percent discount to what they were available 2 years ago which is infact 30 percent net down if you include inflation and people were more optimistic then. And now the same property is available 30 percent less and they are sad even if they are not invested.

    Great time to begin long term investing journey if one is an HNI investor.


    Rental yields have to pick up before there is any meaningful rally.

    It is going to be a long time correction until and unless there is massive money printing.

    4-5% rental yield can be considered a decent threshold.
    So property prices have to fall and rentals have to rise and only then markets would pick up.
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  • Originally Posted by amitca9
    when this bubble gonna burst, still people are holding tight and people here on IREF are shouting about burst since last 2 years. Also any idea what is the meaning of this bubble burst in terms of decline in property price from the peak level.

    You mean bubble has not burst yet ??
    Bubble burst means that ignorant investors keep holding on to their properties which is losing its market value day by day, and denying what everyone can see, except *some* invested guys.
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  • This comment was posted as a teaser to say that everything is used to support bubble burst.
    People don't stop living just because one day death is certain.
    People don't run away just because there may be earth quake one day.
    People live in the hope of things improving one day.
    People invest in the hope of making profits one day though they may be deterred by current events temporarily.
    Mad rush begins one day and some may be hurt in that stampede.




    Originally Posted by rambler
    Earth quake in North India will destroy RE there
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  • There are millions and millions of people with money to hide.If they take out money from one sector where will they keep it hidden ? The best place for burial is the ground.So the lack of interest in RE does not shake them.Anyway all this money will remain there with notional profit keeping the investors happy or a bit worried.Don't expect any drastic distress sales which are far and few even now.Any 2bhk in decent areas in Banglore will cost 20000 per month even now. In some areas it is much more.Only in far flung areas you get it for less than that.


    Originally Posted by ashish18
    You mean bubble has not burst yet ??
    Bubble burst means that ignorant investors keep holding on to their properties which is losing its market value day by day, and denying what everyone can see, except *some* invested guys.
    CommentQuote
  • Originally Posted by zzzzzzzzz
    Ha ha ha.... ha ha ha ha ha ha ha ha. Everyone thinks so about the area where they are invested. I have been to the Dwarka Xway multiple times. Its nothing less than a jungle today. There are a few and far away projects dotted by dirty villages, non existent road and what not. As a property dealer told me, people who can afford only a 2 BHK in Dwarka will shift here because here they will be able to buy a 3 BHK for same price. Thats is. Reaching the populated areas of Gurgaon, from any part of DX is a tedious affair and will remain so for years to come.


    zzzzzzzzzzzz,
    Any areas under developing is always Jungle. Once completed will become MANGAL.
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  • Originally Posted by rambler
    There are millions and millions of people with money to hide.If they take out money from one sector where will they keep it hidden ? The best place for burial is the ground.So the lack of interest in RE does not shake them.Anyway all this money will remain there with notional profit keeping the investors happy or a bit worried.Don't expect any drastic distress sales which are far and few even now.Any 2bhk in decent areas in Banglore will cost 20000 per month even now. In some areas it is much more.Only in far flung areas you get it for less than that.


    New money is needed to raise prices. As long as new money is not coming in, that's bubble burst. May not be crash, may be stagnation but bubble no longer exists.
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  • Black money is being created by the hour and that is new money. Go to any office and you find that bribe rates have gone in accordance with inflation.New regulations are creating new avenues for bribe.Even beggars don't accept less than one rupee :D:D:D

    Originally Posted by zzzzzzzzz
    New money is needed to raise prices. As long as new money is not coming in, that's bubble burst. May not be crash, may be stagnation but bubble no longer exists.
    CommentQuote
  • Originally Posted by rambler
    Black money is being created by the hour and that is new money. Go to any office and you find that bribe rates have gone in accordance with inflation.New regulations are creating new avenues for bribe.Even beggars don't accept less than one rupee :D:D:D


    So what if black money is being generated. As long as it is not being invested in RE, how does it matter?
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  • you are saying this bubble burst based on the knowledge gained on IREF or from the real inputs from the market. Just try and search in the market and quote 20 lac less from the seller asking price and i am talking about properties more than 2cr, i am sure he even come back to you. Just go out in the market, this is my experience after looking for around 20 properties, not sure if i am wrong and not looking at the right place.
    But one thing is for sure that these small time builders are not that leveraged and have no interest in selling the property at loss. They would rather let it depreciate but wont take a hit on the capital and book loss.
    Secondly what is the use of that money, which they will get from the sale of flats, still more than 50% of the money is received in cash, so essentially they have to buy another property from that money or keep it in bank locker. So what you advice to them, sell their property and again look for new property or sell the property and keep the cash in locker

    Originally Posted by ashish18
    You mean bubble has not burst yet ??
    Bubble burst means that ignorant investors keep holding on to their properties which is losing its market value day by day, and denying what everyone can see, except *some* invested guys.
    CommentQuote
  • Originally Posted by amitca9
    you are saying this bubble burst based on the knowledge gained on IREF or from the real inputs from the market. Just try and search in the market and quote 20 lac less from the seller asking price and i am talking about properties more than 2cr, i am sure he even come back to you. Just go out in the market, this is my experience after looking for around 20 properties, not sure if i am wrong and not looking at the right place.
    But one thing is for sure that these small time builders are not that leveraged and have no interest in selling the property at loss. They would rather let it depreciate but wont take a hit on the capital and book loss.
    Secondly what is the use of that money, which they will get from the sale of flats, still more than 50% of the money is received in cash, so essentially they have to buy another property from that money or keep it in bank locker. So what you advice to them, sell their property and again look for new property or sell the property and keep the cash in locker


    What is your definition of bubble? In bubble days, you would go to this same seller with an offer of 2 Cr and he will still not sell because next months an offer of +20L was coming. That was bubble. That's burst now. We are in a slow deflation. Time wise and price wise. If you are impatient, go and buy for 2 Cr. If not, put money in FD and relax. This property will still be 2 Cr. 5 years from now.
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  • Originally Posted by rambler
    Black money is being created by the hour and that is new money. Go to any office and you find that bribe rates have gone in accordance with inflation.New regulations are creating new avenues for bribe.Even beggars don't accept less than one rupee :D:D:D


    well one will be greatfull if they accept 1 rupee!!

    off-topic

    just few years back i was feeling great so gave a beggar 10 Rs : to my surprise he went to the kirana shop and had a coke... in the 1 hour i was there and seeing this beggar he collected 10 Rs and had coke.... 3 coke in 1 hr

    another incident i was with a female friend of mine and we took soofty.. beggar came and asked for money... i gave 2-3 coins of 50pc he got offended and grabbed on softyy... and rannnn away....!!!
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  • Service tax is increased to 14% w.e.f 1st june 2015
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  • Office leasing up, but residential sales still muted in most markets: DLF

    NEW DELHI: India's largest real estate firm DLF Ltd said a pickup in office leasing has helped it rent out close to 1.5 million square feet in 2014-15, even as most residential micro-markets it is present in are experiencing muted sales.

    "As more absorption is happening, rentals are rising," Saurabh Chawla, executive director for finance at DLF, said in a conference call with analysts, referring to its main office district Cyber City in Gurgaon.

    DLF has very little space le ..

    Read more at:
    Office leasing up, but residential sales still muted in most markets: DLF - The Economic Times
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