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 Mythbuster
    For some strange reason, I have seen that Mumbai is the pet city in India for arguing in favor of ever increasing RE prices by the brokers and builders.

    You meet a builder or broker, and you say "its too expensive", they say "Look at Mumbai - its cheaper than that"! when you say its too small, they say "Look at Mumbai its bigger than that".

    I have never been able to understand "why Mumbai?"


    its a myth created by brokers for people who hav never been to mumbai or for those who dont knw much abt mumbai.
    couple of relatives frm mumbai had bought flats there few years back n either they r protesting on roads against the builders or crying for buying too expensive
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  • Infact Mumbai example shows that prices cannot increase beyond a certain limit.
    Mumbai prices are stagnant for many years, whatever people may say that they are increasing, the ground reality is that no deals are happening and at much less than quoted price if a rare one ever happens (my neighbour's flat in Mumbai is on sale for 3 years now and he has been decreasing the price every 6 months, still no takers !!). This has made the investors almost vanish from Mumbai markets.

    Affordability is the key. And once the target person i.e the enduser cannot afford, the whole ponzi scheme collapses. That may explain why price is languishing for almost all projects in GCX because there just arent enough endusers who can afford the 2 Cr upward flats.
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  • Originally Posted by kumar77
    You are forgetting migration. They are right now either studying or staying in their respective home towns. They hope to move to cities like gurgaon, noida, mumbai, or bangalore. The list is not exhaustive.
    I am from Delhi and did my post graduation in Agra. All of my class mates, juniors, and seniors have moved to metros.

    2. Chidambram says we are obsessed with Gold, you say we are obsessed with RE, Analysts are saying stay away from equity, ek din aayega jab woh kahenge ki paisa kamana chod do aur sadak par aa jaao. Paro ki yaad aa gayi, :(.


    But, tell me one thing, if some one has 60-70 lakh and has good potential of earning more money, what should he/she do? There are many such people in the market.

    We are living in a troubled economy and if we dont hedge against inflation and depreciating rupee, we are doomed. There will be no difference between a person who is earning 3 lakh per year and the one earning 10 lakh per year. Because the former will be saving only 50000 and the latter will be saving 4 lakh. And, this 4 lakh is depreciating effectively turning to toilet paper.

    Tell me, what are the options? I, as one, dont want to invest in RE. But look at the hoard of investors in Palm Hills, Palm Gardens, Gulsham Ikebana, etc. The way builders increase the prices every other day. In other countries, a builder build apartments and then sell them. In India, these builders take money from us, sit on it, and deliver unacceptable quality. Still, there are investors, and that too in huge numbers.

    We are looking at white money transactions, stock etc, and reasoning its effect on RE which is majorly in colored component. Is it right to derive conclusions from the component of the economy that thrives on white component?

    Since 2008, we are saying RE bubble will burst. I am sick and tired of listing to it seeing that nothing is happening. Bubble is growing big and getting harder every day because of black money. To top it, politicians and banks come to the rescue as it happened in 2008. Had the banks not supported these builders in 2008 it would have put an end to speculation.

    Government is expecting that there is a speculation in the forex market, therefore it has raised short term interest rates. Also, there is speculation going on in the agricultural products so government has intervened and opened some shops where vegetable products will be/are available at reduced prices, only because this is election year. Roti, Kapda, aur Makan - These three things should be available to every person without any hassles. Makan, what has government done about it? Everyone knows there is speculation in the market but government does not intervene. Government very well knows that all transactions in RE has colored component in it and again no intervention.

    Choro ke beech main rehna hai to Kya kare? ya to chor ban jaaye ya to choro ko lootne de.


    1) when students come to delhi n "migrate" as u quoted it doesnt result in real estate demand, had that been the case greater noida wudnt b what it is today. students stay as PG's or in hostel. demand for housing increases when families shift to metros. go through the graph of migrating people, people migrating to delhi has constantly decreased over last 2 decades. and with 'not so many jobs' do u expect 10 lakh families to shift to delhi from other parts of india this year ? i dont, even if they do they hav sufficient supply in delhi/ncr.

    2) i dint say that we r obssessed with RE, it was u who said that.

    3) u dont realise that bubble has already bursted because u r not in the market to sell ur flat. try to sell it and u will come to know if it has bursted or not. and if ur defination of bubble burst is that one fine morning a house which was available for 50 lakhs a night before is available for 25 lakhs in the mrng then thats never going to happen. its a slow n steady process, so slow that u wont even notice it. n also dont expect property dealers to tell u that its bursted.
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  • Originally Posted by kumar77
    Rakesh jee, the whole equity market was rallying on QE money.

    Who believes in india growth story?
    a. investor
    b. Common man
    c. congress
    d. none of these

    The answer is C.

    What growth story? Where is the growth? Tell me.

    No, I will not give you any numbers for it. You, yourself, are the best judge.

    Answer the following questions

    1. Do we get electricity 24 hours a day?
    2. Do we get water 24 hours a day?
    3. How safe do you feel when dealing in business?
    4. How safe do you feel when you are outside, especially in a deserted place?
    5. How safe do the women of India feel?
    6. Chain snatching, robbery, murders, rape, have they decreased?
    7. Are you sure about your future that you will be able to live a comfortable live after retirement?
    8. Do you like the infrastructural facilities and condition of roads in your neighborhood?
    9. What happened when it rained last time in your neighborhood, was there no water logging?
    10. Are medical facilities readily available to poor?
    11. Do you feel that you can approach the court and get the problem resolved if you are cheated?

    If your answer is NO to all these questions, then where is the growth?

    yes, there is growth
    1. Ambani has built the costliest bungalow in the Mumbai.
    2. Indians hold the highest amount in swiss banks.


    If you want, I can also show you numbers that there is QE money or PE funds invested in RE. as a starter read this,

    Purvankra borrowed money from JP Morgan
    J P Morgan provides $70 million debt fund to Puravankara - Times Of India


    Jaiprakash and its debts
    Debt concerns come to the fore for Jaiprakash Associates - Livemint

    There are many more, you are smart enough to find it out.


    Equity market was flush with QE money so it's taking a beating. But the % of QE money in RE is minuscule & that's why we don't see those kind of effects of QE tapering or threats of QE tapering on Indian RE. Stagnation in RE is due to stagnation in economy.{PS-I am not justifying some overpriced RE segments which might see correction}. Even if interest rates increase by a few percentage points due to inflation, that is not something which hasn't happened in the past & may lead to some stagnation & minor price correction in overpriced segments.

    Last few years have been tough mainly due to the corrupt, inefficient govt. So won't the effects of an efficient, less corrupt govt be positive rather than negative? Tomorrow if there is a whole-hearted Manufacturing policy implementation, the way China did, won't u like to invest in RE in those manufacturing hubs which will see growth & real jobs unlike some fly by night outsourcing jobs, rather than sit pretty with idle money?

    Countries develop due to the zeal of its people, the policies of its govt, the fundamentals of its economy. Countries don't develop due to outside money. Outside money is only some money with which countries play around to quicken their growth. UPA was a bad player in that sense but India sure has players who can play around well too!
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  • and guys always remember common sense always prevails over all these long explanations, technicals, graphs and economical explanations.
    in hindsight all these technical analysts will return back with their technical reasons for fall in prices etc.
    common sense says prices r too much, and not in sync with average salaries in india and an average citizen of delhi or mumbai cant buy a simple 2 bhk house in these cities which is not a luxury but a basic necessity
    flats r available easily for rent at less than 0.2% of value of these flats, which simply shows that thr is no severe demand for housing, that is, people r not sleeping on roads bec of less houses, but its a case of inflated prices bec of buying of houses as a speculation and not for residing
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  • Originally Posted by ruchika1
    1) when students come to delhi n "migrate" as u quoted it doesnt result in real estate demand, had that been the case greater noida wudnt b what it is today. students stay as PG's or in hostel. demand for housing increases when families shift to metros. go through the graph of migrating people, people migrating to delhi has constantly decreased over last 2 decades. and with 'not so many jobs' do u expect 10 lakh families to shift to delhi from other parts of india this year ? i dont, even if they do they hav sufficient supply in delhi/ncr.

    2) i dint say that we r obssessed with RE, it was u who said that.

    3) u dont realise that bubble has already bursted because u r not in the market to sell ur flat. try to sell it and u will come to know if it has bursted or not. and if ur defination of bubble burst is that one fine morning a house which was available for 50 lakhs a night before is available for 25 lakhs in the mrng then thats never going to happen. its a slow n steady process, so slow that u wont even notice it. n also dont expect property dealers to tell u that its bursted.


    What are u talking about?

    A piece of land I bought in Jan this year has given me appreciation of 20% in the market when I enquired about it a few days back. I tried to buy an adjacent land to the land I bought & the seller did not budge even 2%. If you get fleeced by builders & end up as the last scapegoat bearing the brunt of builder profiteering & cuts of the speculators & now seeing some stagnation in your flat due to bad economic situation, that doesn't mean RE is collapsing!
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  • Land and Flat not the same

    Originally Posted by rakesh311
    What are u talking about?

    A piece of land I bought in Jan this year has given me appreciation of 20% in the market when I enquired about it a few days back. I tried to buy an adjacent land to the land I bought & the seller did not budge even 2%. If you get fleeced by builders & end up as the last scapegoat bearing the brunt of builder profiteering & cuts of the speculators & now seeing some stagnation in your flat due to bad economic situation, that doesn't mean RE is collapsing!


    Piece of land not comparable to flat.

    One is in short supply (especially well located). The other is in oversupply.

    One cannot be badly constructed. The other one is genreally having lots of issues.

    Of course, right now its the turn of flats. When the time comes land too will become illiquid and difficult to sell. It just happens after the slump in flats so you have to wait a little.

    cheers
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  • Originally Posted by rakesh311
    What are u talking about?

    A piece of land I bought in Jan this year has given me appreciation of 20% in the market when I enquired about it a few days back. I tried to buy an adjacent land to the land I bought & the seller did not budge even 2%. If you get fleeced by builders & end up as the last scapegoat bearing the brunt of builder profiteering & cuts of the speculators & now seeing some stagnation in your flat due to bad economic situation, that doesn't mean RE is collapsing!


    :)
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  • Originally Posted by wiseman
    Piece of land not comparable to flat.

    One is in short supply (especially well located). The other is in oversupply.

    One cannot be badly constructed. The other one is genreally having lots of issues.

    Of course, right now its the turn of flats. When the time comes land too will become illiquid and difficult to sell. It just happens after the slump in flats so you have to wait a little.

    cheers


    absolutely right.
    i believe land will b more difficult to sell when the accelaration to this slump steps in.
    u cant live on plots, u hav to construct a house. atleast in flats people can live.
    agree tht plots r , rather WERE better investment but in slump time its not easy to sell plots
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  • Originally Posted by wiseman
    Piece of land not comparable to flat.

    One is in short supply (especially well located). The other is in oversupply.

    One cannot be badly constructed. The other one is genreally having lots of issues.

    Of course, right now its the turn of flats. When the time comes land too will become illiquid and difficult to sell. It just happens after the slump in flats so you have to wait a little.

    cheers


    I had mentioned about flats too earlier.

    Kolar road, Bhopal>Agricultural land-250 rs/sq ft. 1800 sq ft apartment-31 lacs

    DE way, Gurgaon>Agricultural land-250 rs/sq ft. 1640 sq ft apartment-85 lacs

    (Apartment quality is comparable. No gold bricks in DE apartment..lol)

    Rest all factors like input cost, red tape etc at both the places are more or less the same.

    So why is builder running away with huge profit margin in DE way while a sensible builder is making just 10% profit in Kolar road, Bhopal? Does Gurgaon builder spend a penny on Gurgaon infrastructure or builds roads & industries in Gurgaon before building his apartments?

    Only one reason-Builder can gauge the helplessness of Gurgaon buyer & the dynamics of gurgaon market & he will keep building flats till the time people buy it. If people can buy at exorbitant prices, why should he complain of high prices?

    So should end user stop buying at DE way?.. I can't say!....Lot will depend on how Gurgaon progresses in future. Determining fair price of a property is very important. If one can make profit even by buying at 85 lacs, then he sure knows the market well, otherwise recession proof apartments at less prices are available for the less knowledgeable too (or will the agricultural land rates in Bhopal will fall to 10 rs/ sq ft in coming years?..lol)!

    Generalisations don't work in RE!
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  • Originally Posted by ruchika1
    1) when students come to delhi n "migrate" as u quoted it doesnt result in real estate demand, had that been the case greater noida wudnt b what it is today. students stay as PG's or in hostel. demand for housing increases when families shift to metros. go through the graph of migrating people, people migrating to delhi has constantly decreased over last 2 decades. and with 'not so many jobs' do u expect 10 lakh families to shift to delhi from other parts of india this year ? i dont, even if they do they hav sufficient supply in delhi/ncr.
    seems like you just want to justify your point. I have been born and brought up in delhi. I dont need to see the charts to know how many people are migrating to delhi. When I said students, I mean, future migrants. They will study and finally end up in metros looking for jobs, have famlies, and guess what, need a place to stay.

    2) i dint say that we r obssessed with RE, it was u who said that.

    3) u dont realise that bubble has already bursted because u r not in the market to sell ur flat. try to sell it and u will come to know if it has bursted or not. and if ur defination of bubble burst is that one fine morning a house which was available for 50 lakhs a night before is available for 25 lakhs in the mrng then thats never going to happen. its a slow n steady process, so slow that u wont even notice it. n also dont expect property dealers to tell u that its bursted.

    If it is a slow process then it is not a bubble is not the appropriate work, may be call it a leak. Bubble leak and not bubble burst. I agree it is in the process. But, we dont know how long it will leak or some one will come and fix it from leaking (Read bank policies).



    I am not in favor of the way RE is shaping up. But, then I want to be reasonable with my though process and not with my pocket.

    I have experienced that people who can afford are buying and those who cannot afford think that the RE is overpriced and it should burst.
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  • Originally Posted by realpune
    Yt?

    Why you consider 25000 as salary while comparing rent ? When it comes to buying you take it as 1L !

    Why take 1984 data for projecting rentals ? Did we have so many RTM vacant investor flats of this scale then ? Landlords are struggling to get family as tenant in Pune today.

    I can see landlords desperate to find tenants. And tenants getting bargain deals in Pune. The rentals will only change when demand supply ratio changes, rentals truely reflect this ratio.

    There may be increase in rentals over 2-3 years as end users have stopped buying, but this won't be overnight. Many would have locked in on lower rentals if the agreement is for 3 years.



    Sent from my KFTT using Tapatalk 2


    Learn to read what is written.

    Nobody earning 1L lives in lal dora 2 room set.

    Those who live in what is basically tenement earn on average 25000 Rs pm. Otherwise they cannot afford even that. Rent is 15000 in South Delhi or cenbtral Delhi for such 2 room sets

    Those earning less than 25000 PM cannot afford to live in Delhi and have to keep family in village.

    With transport cost of 50Rs per day, rent of 7000 in 2 room set across UP border or remote Lal Dora areas of Delhi like Najafgarh is still possible. Most such people have to spend time effort and money in such commutes.

    I am talking about Delhi, why are you confusing with Pune?

    Those earning 1L per month can currently live on 30% as rent = 30,000 Rs. Soo it will become 50% = 50,000 pm.
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  • Venky,

    I remember reading a post from you in 2011 about the projections (as per you) of 2012. Can you write something on the same lines for 2014?
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  • Originally Posted by Venkytalks

    Ruchika rent for 2 room set in Lal Dora villages of Delhi is the benchmark for rent. It has gone from 7000 in 2008 to 14000 in 2013. It is over 50% of a 25000 salary.

    Venky, you are at it again. Giving wrong data and making predictions without any basis.

    In Dwarka society flats, 2BHK rental is in the range of 14-18K. Search 99 acres. These are in sectors closest to Gurgaon.
    My friend and my brother are both living in Dwarka, 1 BHK for 10K. Sector 12 and 18 resp.
    My parents own a home in Uttam Nagar and there are a lot of builder floors around going for 10K rent for 2 BHK and still lying vacant. Legally registered with BSES power and DJB water and 5 min walking from Metro Station.

    Basically doubled in 5 years.

    Since your data is wrong, any conclusion drawn form it is wrong too.

    Keep observing its behaviour. In 1984 rent used to form 50% of salary for senior govt officer salary of 4000 Rs when rent for DDA flat was 2000 Rs.

    Are you really that naive? Really?
    You believe the senior officer was only taking home 4000 Rs?
    Every day there is news where a small time govt. employee is found to have property worth crores. You think they are only earning what their pay slip shows?
    (For ex., There were Asian games held in 1982 and the loot was no less than in recent CWG.)

    If congress follows same backward policies as 1980s you should expect same results.

    Okay! So you are not so sure anymore. Planning an escape route already?

    If salary is 1 Lakh take home pay expect 3BHK rent close to work in say Sohna Road to reach 50000 Rs per month.

    I think Vipul rent there 30000 per month. So a doubling is on the cards.

    And what expense will they cut down? Healthcare? Kids education? Car? Food?
    I am giving you a real-life example here. Read and understand.
    One of my colleagues lives in a Sohna Road society. His neighbour, originally from a place near Dehradun, makes about 80K PM and has two school going kids. He is finding it difficult to make ends meet. He is planning to move back to Dehradun where he says he will get a job for about 50-60K only but he will be closer to his native place.
    RENTS CANNOT GO UP UNLESS INCOMES GROW.

    Keep watching
    Sent from my GT-N7100 using Tapatalk 4 Beta


    I am watching you.
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  • Contrary to thread title "The Bubble May Be Set To Burst Again"; prices are nearly double than 2 years back when thread was started.
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