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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  • If this data is true we are talking about around 3.5 Bn dollars money pumped into property every year by NRI - that is almost 20,000 crores every year...

    We also need to near in mind that with this 20,000 cr, NRIs can actually buy properties worth much more because of approx 30% payment on each year...20,000 cr cash hits the system every year (offcorse significant % NRI buy Land/RTM and pay all upfront)

    What do people make of that number?
  • Matrix bhai - please read the disclaimer by RBI

    Since family members of NRI account
    holders were the survey respondents, investment in types of activities such as
    the purchase of land or a house by NRIs beyond the knowledge of
    respondents were not reported in the survey.


    This 4% figure is underquoted. The survery respondents are family members, many of whom would not know all the investments plus how many people actually disclose all their investments.. IF RBI/any external survery agency comes to my family, do you think they will disclose to them all the properties i Hold :D LOL

    Like all statistics, even this one is flawed and conceals more than it discloses..
  • Infosys unlikely to give salary hike to IT staff

    BANGALORE: Infosys's IT business is unlikely once again to give a salary increase to employees in the traditional April-May timeframe. However, the BPO division is expected to announce a single-digit hike in June for lower level employees.

    BPO revenues grew a healthy 17.8% in 2012-13, compared to IT services that grew sub-6%, which perhaps is the reason why the former is being treated differently. The BPO division has about 25,000 of Infosys's 1.5 lakh employees. Infosys said it doesn't comment on rumours and speculation.

    The company's normal practice is to give promotion letters and increment letters at the same time. This year, while promotion letters have been handed out, these have not been accompanied by increment letters, indicating that the company is likely to watch what the rest of the industry does before taking a call on increments. Last year, salary increases were given only in October, when the company came under pressure from increments offered by peers.

    "It's unusual to get a promotion without a salary hike," said an Infoscion, who did not want to be named.

    G C Jayaprakash, Asia-Pacific technology leader in executive search firm Stanton Chase International, said the industry was not able to sustain the high-growth rates it did till 2006-07, so "the hikes will be muted across the board".

    Infosys, in particular, has been going through a tough phase. Its revenues have grown significantly lower than of peers like TCS and Cognizant. In a recent stock exchange filing, Infosys said its CEO S D Shibulal took a 27% cut in salary to $119,774 in the 2013 financial year compared to $162,990 previously due to a steep reduction in the bonus component. His bonus dropped 70.14% to $15,918.

    The same filing, however, also notes that wage hikes are inevitable due to competitive pressures. The company said it has to increase employee compensation more rapidly than in the past to remain competitive with other employers, or seek to recruit in other low labour cost jurisdictions to keep wage costs low.

    The company said in April that it was working on a new salary structure where the fixed component would be higher. Kris Lakshmikanth, CEO of recruitment firm Headhunters India, noted that the variable payout was as high as 50% of the total compensation at the senior level. "The company's lackluster performance washed out a large portion of the variable pay for employees," he said. The revised structure may be something that employees can look forward to.

    Infosys unlikely to give salary hike to IT staff - The Times of India

  • Only Asia ? I am surprised.
  • Good data points!

    However, the one on break up of software professionals in various parts of world, if you add up middle east region percentages, it comes to ~ 60% software professionals in middle east compared to ~13% in north america. Doesn't seem right....

    Originally Posted by matrix_55
    Was trying to understand the NRI Effect on NCR RE.. following are interesting reads

    The source of remittances - The Hindu
    http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/72983.pdf (breakup of nri per country in last section)

    Key Pointers:

  • Originally Posted by shrek2011
    Good data points!

    However, the one on break up of software professionals in various parts of world, if you add up middle east region percentages, it comes to ~ 60% software professionals in middle east compared to ~13% in north america. Doesn't seem right....

    I think this is people sending money home to family. Few it people in USA will send money home.

    From gulf people cant take family and will remit
  • Gold could go to $ 1050 on solid us economic data

    Gold hits 1-month low as Fed pressured to end stimulus - The Economic Times


    Gold fell for a seventh straight session on Friday, its longest losing streak in four years, as the dollar rose to the highest since 2008 after some Federal Reserve officials said the central bank should end its stimulus for the U.S. economy.

    Investors also rejected gold's safe-haven lure after a May reading for U.S. consumer sentiment hit a near six-year high, showing Americans are feeling better about their financial and economic prospects.

    With a few more hard losing sessions, we could be down to between $1,050 and $1,100. It could happen over two weeks or it could happen in a couple of days if the market plunges $100 a dip," said Frank McGhee, head precious metals trader at Integrated Brokerage Services in Chicago.

    "There's heavy rotation of money from gold into the stock market as the U.S. economy keeps getting better and the need for Fed stimulus gets weaker by the day," McGhee added.

    A trio of hawkish regional Federal Reserve officials have called on the central bank to stop buying mortgage-backed bonds, citing the recent improvement in the U.S. housing market
  • Kaha gaye - saare Gold suggest karne waale??

    ABC, Wiseman, Sanajana :D

    Aacha hui aapki baat nahi mani, varna :D lag jaate
  • as i preach my fellow members many times - Joh chees jitni speed se upper jati hai usse double speed se neeche bhi aati hai......Share market mai hua, GOLD mai hua ab baki RE ki hai :D
  • RE ka number kab aayega
    sab niche aane ki ummid mein khade hain
  • Originally Posted by Krazy Yuppie
    RE ka number kab aayega
    sab niche aane ki ummid mein khade hain

    Isiliye toh nahi aa raha :bab (59):
  • Fundamentals of Gold are still strong.

    There is a currency war going on and many countries are printing massive amounts of paper notes . Every country wants to win this race to bottom so that their exports become competitive.
    Japan is the recent entrant.

    Gold is a an emergency hedge, a store of value and one of the most reliable medium of exchange whenever shit hits the fan.
    The ca-sino & crony capitalism along with privatisation of profits and socialisation of loss can not go on forever.

    Logically Bond bubble should Burst before Gold Bubble.
    How long can zero percent interest rates?

    When the interest rates rise above 10%; that would be the time to sell Gold and Silver.

    Actual it is a fight between Real ( Gold,Silver,oil,Wheat , vegetables etc etc.) Vs the Financial (the paper Note).

    It is difficult to store Oil or wheat or vegetables and they get destroyed over a period of time.That's why the other real thing like Gold and Silver are saved as store of value.

    Both these metals are inert ( Hold value over time), extremely malleable and Ductile ( can be divided into small quantities and coins). Moreover they have a History as Money i.e medium of exchange and store of value.
  • Dealing with gold like day traders!

    Originally Posted by amit001
    Kaha gaye - saare Gold suggest karne waale??

    ABC, Wiseman, Sanajana :D

    Aacha hui aapki baat nahi mani, varna :D lag jaate


    I continue to recommend gold to everyone I meet. Every $100 fall, buy some more, you will get more quantity as you go down.

    In fact my Reliance Gold daily average purchasing is now giving me a price quite close to current market price even though I started when prices were above 30k per 10gms.

    If you are looking at gold like day traders look at stocks, you deserve what you get.

    Apart from the fact that economic conditions have not moved much from their depths a coupld of months ago and we are once again getting into a false goldilocks situation where news is spun to show all is well, the physical gold market is seeing shortages and much higher premiums. Besides, new gold supply is getting reduced and stocks in Comex and LBMA are seriously down. Bullion banks are now long gold and are buyers.

    I see this as the final battle by the shorts to prevent a run on depleted physical gold which could see sharp increase in gold prices if they run out of stocks for delivery and the true conditions of economies worldwide once again return into the news.

    Till then, I continue to buy gold as my target for the 3-5 year timeframe remains unchanged.

    Perhaps I'm the only one right now with that outlook on this forum. So, whats new? :D

  • Good to get the reply wisey.. and also to hear that you are still firm on your hypothesis.

    Well done.

    Lets see how it pans out..

    I am a firm believer in 10% of portfolio in gold...nothing less nothing more and I have been maintaining that ratio...

    any thing more is living in a make belief bearish world.
  • Any rupee weeknesss will help the RE and the NRI :D

    Weaker Rupee, cheaper RE in INR terms :D :D


    Rupee to end 2013 in range of 56.50-57/$: Credit Suisse

    Lo Kal lo bubble bust

    May be venky was right bubble will bust in dollar terms. Infact from 45 to 56, 25% correction did actually happened.