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.
Attachments:
Read more
Reply
35744 Replies
Sort by :Filter by :
  • What about impact of dollar gaining?

    Originally Posted by wiseman
    I agree with some and disagree with some other points.

    First of all consumption last year (we only have full data for that) globally was around 87.x mil.bpd Vs production of around 82.x mil.bpd. So, while demand in the US may be in recession, China and others are really the ones who are ramping up.

    Second, without underlying demand, speculators alone will not be able to keep prices pumped up for long. So, there is also the possibility that all that oil floating around in tankers may be the reason for a lot of stock not hitting the market. But the indications are that supply constraints are definitely there, without which prices will not remain up for such a sustained period.

    Third, when US states a 4-5 mil barrels drop in stock you can see prices go up as much as $10. So, 30 mil barrels is not "peanuts". Maybe its peanuts compared to 720 mil barrels, but you may be careful using the word "peanuts" when the amount could impact price as much as $30 in the short run.

    Lastly, I do not see prices come down much. In fact I do not see them coming down much below current levels. After all the speculators know that summer traffic will take up the slack and once the reserve has to be replenished, they will take prices up again!

    Besides winter will then come on and consumption will spike so do not expect prices to remain low for too long.

    It all comes down to what impact the upcoming recession will have on consumption and therefore the final price of oil.

    cheers


    Wiseman,

    Isn't recent gains in dollar also impacting oil price and for that matter all commodities? Oil has been going down for couple of weeks now as QE2 end is getting factored in; no signs of QE3 and Euro weakening from soverign debt issues.

    60 million barrel release seemed like "garam lohe pe hatoda" to get oil further down but unless there are signs of QE3, I suspect downward trend in oil to continue. You may argue release of oil itself was a form of QE3 but that doesn't have a dollar weakening impact as printing money...

    Faisal
    CommentQuote
  • Market Capitalisation of Real Estate Stocks Goes Down by Rs 35,000 Crore

    Though property prices have not gone down in spite of sluggish sales numbers, property stocks have. The market capitalisation of realty stocks has eroded by Rs 35,305 crore in the last 18 months. The full market capitalisation of BSE Realty index declined to Rs 75,128 crore on Thursday from Rs 1.10 lakh crore on December 31, 2010. The CNX realty index consisting of 10 stocks has declined 39 per cent in the last one year and barring Godrej Properties, all others have seen a price correction from 17 per cent being the lowest (Oberoi Realty) to 85 per cent being the highest (Orbit Corporation), reports Business Line.

    “The realty sector today is last in anyone’s list to invest as it is not the best of time for them,” said Prakash Diwan, head — Institutional Equities, Networth Stock Broking. “Those who also have some business interest in infrastructure might bounce back but pure realty players will see tough times ahead.” Experts said real estate players had managed to rope in investors into their projects who were cash rich and are hence able to hold on to property prices better this time. “With this business not following free market dynamics, inventory usually changes hands from one developer to another and only extreme market conditions would prompt a distress sale,” they said.

    Experts also observed that metros would see a 25 per cent correction in prices going forward. “It is just a matter of time before prices correct,” said Arun Kejriwal, founder, KRIS Research. “The earlier tactic of keeping list prices intact and giving discounts in kind such air-conditioning, modular kitchens as a pass back is not sustainable as investors would start asking hard questions on the decreasing sales volumes next quarter onwards.”

    In sum, there is unanimity on the street that realty companies would find it very difficult to raise money from the equity markets in the future.


    Market Capitalisation of Real Estate Stocks Goes Down by Rs 35,000 Crore
    CommentQuote
  • Good points ...

    Originally Posted by FaisalA
    Wiseman,

    Isn't recent gains in dollar also impacting oil price and for that matter all commodities? Oil has been going down for couple of weeks now as QE2 end EU)is getting factored in; no signs of QE3 and Euro weakening from soverign debt issues.

    60 million barrel release seemed like "garam lohe pe hatoda" to get oil further down but unless there are signs of QE3, I suspect downward trend in oil to continue. You may argue release of oil itself was a form of QE3 but that doesn't have a dollar weakening impact as printing money...

    Faisal


    There are many other factors affecting $$$ Index. You are right that DI does have inverse correlation with oil, but this is not a tight relationship.

    There are many, many arguments about this recent concerted effort by IEA(EU) & US(Obama/Bernanke) to bring down oil prices. Libya, Obama/Bernanke approval ratings, preempting upcoming Summer & Winter spikes are all being cited.

    Next 30 days movement in oil prices will really be the judge. If they don't fall much (or fall & rise), this whole exercise would have been futile (like QE2) & will only introduce even more volatility in oil prices as speculators will hit it up with even more confidence. Lets wait & watch.

    cheers
    CommentQuote
  • Bubble burst

    We are hearing a lot for last one year regarding bubble burst.Nothing substantial has happened.When it will burst only God knows.Everybody is watching the bubble closely.:D
    CommentQuote
  • One needs to be real cautious .

    Aise na ho, ki jab yeh bubble burst ho, to sab kuch apne saath baha ke le jaye .



    "Caution is the eldest child of wisdom"

    "Caution is not cowardly. Carelessness is not courage"

    "Look twice before you leap"

    "Better (be) safe than sorry"


    Originally Posted by Krazy Yuppie
    We are hearing a lot for last one year regarding bubble brust.Nothing substantial has happened.When it will burst only God knows.Everybody is watching the bubble closely.:D
    CommentQuote
  • Bubbbbbble

    Dear Manoj a,
    I am new member to the forum,studying the forum for quite sometimes.I want to invest in Haryana and my best choice is Gurgaon. Based on your advice I have kept my decision on hold and watching carefully the Bubble.
    I have no hurry and waiting for bubble to burst.
    CommentQuote
  • Krazy Yuppie Bhai, i am no body to advise . I am reproducing the articles of various so called RE gurus on correction ( & i seem to concur with many of them on this point ) .

    If u feel that all these guys r wrong go ahead & if u see, correction could be on it's way, hold on for some more time .
    CommentQuote
  • Demand for Home Loans May Decline: Experts

    At the peak of the global housing crisis in 2008, a group of executives at State Bank of India (SBI) were busy devising a new home loan scheme meant to boost the sluggish demand. The growth in housing loans had fallen from a high of 31.2 per cent in December 2006 to 4.1 per cent in March 2009. After State bank of India (SBI) launched its special home loan scheme, home loan portfolio of banks in India rose 30 per cent on a year on year basis till September 30 2010, against 20 per cent in 2009-10, according to data from the Reserve Bank of India (RBI). In 2011, as the housing market in the West slowly picks up, the Indian market may be in for slack. SBI withdrew its home loan scheme with effect from May, after RBI raised concerns on the borrowers’ ability to repay them over longer tenures. After a period of sustained growth, bankers expect a moderation in home loan growth in the coming months. Rising interest rates and property prices are once again set to hit demand for home loans, say bankers.

    The impact of the slowdown is already visible in the priority sector lending portfolio of banks. According to RBI data, the growth in outstanding credit of banks, under priority sector housing loans, halved to 6.80 per cent in April, against 11.90 per cent in the year-ago period. SBI, the country’s largest public sector bank, expects a moderation in the growth in home loans. “We expect a slowdown, a moderation in the home loan market. It has been evident in the last two quarter. It is difficult to estimate the extent of the moderation,” said Diwakar Gupta, managing director and chief financial officer, State Bank of India.

    Close to 30 per cent of the home loan market in India is currently accounted for by the teaser home loan market, according to Monish Shah, director, Deloitte, India. “The withdrawal of teaser loans would have a marginal negative impact on the demand. After 2009, in the two-to three year period, the home loan growth was mostly seen in the teaser home loan segment. It gained about 20-30 per cent market share, which is an absolutely phenomenal growth,” said Shah. SBI launched the special home loan scheme in 2008, under which it offered an interest rate of 8.5 per cent for a loan of Rs 5 lakh and 9.25 per cent for a loan of Rs 20 lakh, with a reset clause after every five years. The scheme was tweaked several times since then.

    High interest rates are also expected to play a dampener. “Demand for home loans is likely to be impacted due to high interest rates. The impact would be more visible in the next two months. Both investors and home loan buyers are likely to wait for few months before buying property. In the last one year, the burden of easy monthly installments for borrowers has gone up by 15-20 per cent,” said S L Bansal, executive director, United Bank of India. The slowdown in home loan disbursements is already visible. The home loan growth recorded by United Bank of India till April was about 10-11 per cent on a year-on-year basis, against 12-13 per cent last year. R V Verma, chairman and managing director, National Housing Bank had said there was a slowdown in the growth in housing loans due to rising interest rates and property prices.

    Smaller banks expect a level-playing field after the exit of teaser home loans from the market. Allured by lower interest rates, several home loan customers had shifted to teaser loans. “Now, we hope our customers will remain with us. Earlier, we saw some customers moving to teaser home loans. “During the first few months, the demand for housing loan is generally low, but for the whole year, we expect a reasonable growth in the home loan portfolio,” said M Narendra, chairman and managing director, Indian Overseas Bank. Rising property prices have also dented the prospects of robust home loan growth. According to realty consultant Cushman & Wakefield, residential property prices in Delhi-national capital region and Mumbai saw prices rise 36 per cent in 2010 on good demand. The trend was reflected in loan disbursements for banks as well. Housing Development Finance Corporation, one of the biggest players in the home loan market, saw fourth-quarter net profit rise 27 per cent rise last year.

    “In some markets, the outlook on property prices is expected to correct, while the interest rates are high. This could lead to a slowdown,” said Vibha Batra, co head, financial sector ratings, Icra. “A lot of factors would contribute to the slight slowdown in credit off-take. Affordability, interest rates and uncertainty in the real estate market are some of the reasons. So, going forward, there would be a slowdown in the home loan market for sure,” Deloitte’s Shah said.


    Demand for Home Loans May Decline: Experts
    CommentQuote
  • well just for argument sake , the hike in interest rates would definitely have a negative effect on sales of affordable and mid segment projects , but it should / would not effect the luxury segment to that extent !!
    is my logic right ?
    CommentQuote
  • Impact on interest rise on Luxury

    Originally Posted by ISHANb
    well just for argument sake , the hike in interest rates would definitely have a negative effect on sales of affordable and mid segment projects , but it should / would not effect the luxury segment to that extent !!
    is my logic right ?


    Hi
    Greetings

    By reverse logic would that imply that by decrease in interest rates, sales of Luxury Appartments is not affected or goes down??

    Well the answer to this question is no.. Obviously, lower interest rates empower lower disposable income investors also to look into opportunity for better lifestyle as well as rental income..

    In case of Higher interest rates, money finds its float in other fixed return avenues due to attractive returns unless the luxury appartment investment is for a dedicate end use and/or from self finance.

    As 1% increase in rate of interest increases a payout by 3.3lacs on loan multiples of 10 lacs for a 15 year loan period.. ( Check important websites page, sliding interest calculator https://spreadsheets.google.com/ccc?key=0Ahk_8tfSUql8dDloWnl4bXFvSjJ6TTB0Uk8taFp2bXc&hl=en&authkey=CKjfg6cD#gid=0) This can reduce investmnents in luxury.. From examples available in case of a down fall, burst, slowdown or recession, existing luxury segment suffers major loss of value and liquidity/resale. At times it even gets frustrating to liquidate in case one wants to shift or exit portfolio..

    Generally interests increase as a result of caution about the economic slowdown and the luxury segment get hurt the hardest.

    my POV, can be wrong..

    Cheers
    CommentQuote
  • The key factor - Ability to Pay

    Originally Posted by BlessU
    Hi
    Greetings

    By reverse logic would that imply that by decrease in interest rates, sales of Luxury Appartments is not affected or goes down??

    Well the answer to this question is no.. Obviously, lower interest rates empower lower disposable income investors also to look into opportunity for better lifestyle as well as rental income..

    In case of Higher interest rates, money finds its float in other fixed return avenues due to attractive returns unless the luxury appartment investment is for a dedicate end use and/or from self finance.

    As 1% increase in rate of interest increases a payout by 3.3lacs on loan multiples of 10 lacs for a 15 year loan period.. ( Check important websites page, sliding interest calculator https://spreadsheets.google.com/ccc?key=0Ahk_8tfSUql8dDloWnl4bXFvSjJ6TTB0Uk8taFp2bXc&hl=en&authkey=CKjfg6cD#gid=0) This can reduce investmnents in luxury.. From examples available in case of a down fall, burst, slowdown or recession, existing luxury segment suffers major loss of value and liquidity/resale. At times it even gets frustrating to liquidate in case one wants to shift or exit portfolio..

    Generally interests increase as a result of caution about the economic slowdown and the luxury segment get hurt the hardest.

    my POV, can be wrong..

    Cheers



    You are correct.

    As we can see from the US, the slowdown is hitting even movie stars and business magnates who "own" Multi-million $$$ homes. Many of these are being repossessed and being auctioned off for millions of $$$ off!

    Of course its nowhere near that here in India.

    The mistake people make is they think by taking a tiny equity in the home (0% in the US in many cases) they "own" the home. Far from it.

    When their current source of paying EMIs get disrupted even for 3-4 months (you don't need to lose a job, only get a large pay cut), one suddenly realises that the Ownership is actually debtor-ship. I know some people who have lost whatever equity they have in their homes built up over years and have to start all over again.

    This is very painful and people should always have this in the back of their mind. What is the risk one is taking chasing the dream of "owning" something far beyond their capacity to pay!

    cheers
    CommentQuote
  • Should one take loan???

    Originally Posted by wiseman
    You are correct.

    What is the risk one is taking chasing the dream of "owning" something far beyond their capacity to pay!

    cheers


    Hi
    Greetings

    I am not sure about movie stars or politicians or big people or the Govt. However, I have never taken a loan in my life. No credit card. No leveraged product ever taken. Basic reason is you dont control it and gives a false sense of ownership/comfort.
    Only reason I would take/suggest ever take a loan is if you get some 1)tax benefits, or 2) saving/getting rent similar to the interest payment-tax benefit. Obviously if the investment is made from the perspective of future capital gains/growth/end use..

    for example, if the installment is for 50000pm and one gets 10000 as tax income deduction and is able to save/get 20000 as rent, one can consider leveraging. In all other situations one is paying bank what could possibly have been yours..

    Only other options are if one is planning not to pay/run with the money:D or getting it for near free rates of interest (like most western govt printing free money).

    Just for your awareness. NO BANKRUPT GOVT IN THE HISTORY HAS PAID ITS DEBTS AND NO INDIVIDUAL HAS EVER BEEN LET GO.
    read armstrong economics.. "soverign debt dance with death" and enjoy...:D

    Cheers
    CommentQuote
  • Originally Posted by silly_boy20
    yaaro sunlo jara - ye india hai amreka nahi -


    Correct but we can learn from the mistakes of others.
    CommentQuote
  • It makes very good sense to take HOME LOAN and that too keeping in mind a comfortable EMI and tenure because-
    a)cheapest interest avlble for loans (makes sense for everybody and especially to BUSINESSMEN)
    b)tax benefits
    c)creation of asset !



    Originally Posted by BlessU
    Hi
    Greetings

    I am not sure about movie stars or politicians or big people or the Govt. However, I have never taken a loan in my life. No credit card. No leveraged product ever taken. Basic reason is you dont control it and gives a false sense of ownership/comfort.
    Only reason I would take/suggest ever take a loan is if you get some 1)tax benefits, or 2) saving/getting rent similar to the interest payment-tax benefit. Obviously if the investment is made from the perspective of future capital gains/growth/end use..

    for example, if the installment is for 50000pm and one gets 10000 as tax income deduction and is able to save/get 20000 as rent, one can consider leveraging. In all other situations one is paying bank what could possibly have been yours..

    Only other options are if one is planning not to pay/run with the money:D or getting it for near free rates of interest (like most western govt printing free money).

    Just for your awareness. NO BANKRUPT GOVT IN THE HISTORY HAS PAID ITS DEBTS AND NO INDIVIDUAL HAS EVER BEEN LET GO.
    read armstrong economics.. "soverign debt dance with death" and enjoy...:D

    Cheers
    CommentQuote
  • India, bubble and the global economy

    Originally Posted by rahul05
    Correct but we can learn from the mistakes of others.


    Hi
    Greetings

    Read the article silly boy.. then go to the authors website.. he write about all the countries in the world.. not just US. Only thing very us is that he criticises the hegemonistic attitude of US in a very objective manner...

    Cheers
    CommentQuote