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 Magadh_Pride
    Ok then we can add the name of Directorate General of Hydrocarbons to the list !

    As for power, its not about wanting things for free- its about a rational pricing and evening the spread.

    BTW, Its a myth that power pilferage occurs only in the unauth colonies. Bulk of the theft is by SMEs and factories and not to forget the kothis running 10 aircons


    Rationality is rare to find when it comes to our policy making. We are importing gas and coal at very high prices. It's becoming even costlier because of rupee depreciation. Cost of setting up plants and infrastructure is going high due to high interest rates on loans. So high power prices are inevitable.

    Talking about sharing and redistribution. We are already paying a high rate of taxation. We are paying taxes on buying goods, service tax is on virtually everything, petrol is taxed at high rates, property taxes, transfer taxes. Inflation is the biggest tax of them all.

    In the end, if you want to do something for the poor, create jobs for them. Subsidize education, healthcare but liberalize other sectors. Giving free food or giving them job security will only make them dependent on doles. It will put money in the hands of middle men.
    CommentQuote
  • Originally Posted by Magadh_Pride
    Ok then we can add the name of Directorate General of Hydrocarbons to the list !

    As for power, its not about wanting things for free- its about a rational pricing and evening the spread.

    BTW, Its a myth that power pilferage occurs only in the unauth colonies. Bulk of the theft is by SMEs and factories and not to forget the kothis running 10 aircons


    And, I thought appointment of DGH was exclusive domain of reliance for last 20 years, before it changed for the incumbent one :)
    CommentQuote
  • And ever wondered why do we need to import coal at high costs when we have the 3rd largest reserves in the world?

    That's another story of cronyism and sarkari inefficiencies
    CommentQuote
  • Originally Posted by Magadh_Pride
    And the regulators are just another way for shielding the crony capitalism...

    AERC: Just see how the private airports have been allowed to levy UDF, PSF, deficits etc etc etc
    DERC: ever increasing utility bills in Delhi
    CEA: coal scam, tariff plaguing and power trading ills
    TRAI: the less said the better

    And now waiting for the RE regulator. Really? What will change?

    Posted from my iPad using Forum Runner


    Dude, regulators are reality and they are present in every country. Do you know how much work TRAI has done till now to increase teledensity and ending stupid monopoly of BSNL.

    AERC - Can't you see world class airports of Delhi etc. Flight prices are still high because of high taxes on aviation fuel by stupid state government. UDF etc. is only 225-400 Rs. while ATF duties are upto 40%!!

    DERC - Do you know Delhi still has the lowest electricity tariffs? Second, Delhi still has more than 22 hours a day supply, while look at Gurgaon and you will have to cry.

    Also, bear in mind regulatory bodies are new to India and they haven't got many powers - Govt still twists their hands. It will get better with time.
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  • Fellow forum members would love to hear back from learned minds like you.

    In the meanwhile, my responses inline

    Originally Posted by harshogle
    Dude, <> regulators are reality and they are present in every country. Do you know how much work TRAI has done till now to increase teledensity and ending stupid monopoly of BSNL. << No, I did not know that TRAI was working to increase teledensity. In fact it must be a well kept secret, as most people think that the teledensity was driven by mobility, fixed convergence and private operators on rev-share models. For records, TRAI was founded 1997 but only started working after 1999. Telecoms was privatised in 1991)

    AERC - Can't you see world class airports of Delhi etc. Flight prices are still high because of high taxes on aviation fuel by stupid state government. UDF etc. is only 225-400 Rs. while ATF duties are upto 40%!! << No, I am still trying to find the 'world class' airports in India. Ones which don't flood at the first rains, which have clean toilets and whose roofs don't leak.

    Please so enlighten us what's AERC got to do with building the 'world class' airports in any case. You also must be having a 'solid jugaad' as you are paying UDF etc as Rs 225 when everyone else is paying a PSF of 225, plus UDF of 1271, plus ADF of 675 which adds up to over 2000 for each international flight leaving IGIA. Indian airports are costlier to take a flight from than HKIA and Changi. No wonder few airlines want to make Indian airports as their hub.

    This when these airports are privatised, and any deficit to capital account of the project costing ought to be made up by the operator and not by levying these charges. GMR though refused to bring in any equity and AERC continues to sanction these charges

    DERC - Do you know Delhi still has the lowest electricity tariffs? Second, Delhi still has more than 22 hours a day supply, while look at Gurgaon and you will have to cry. << Gurgaon must certainly be made of onions that you can get to cry just by looking at it. BTW, who gave you the feed that Delhi has the cheapest tariff with the highest quality of electricity. Please share the source of your secret information>>

    Also, bear in mind regulatory bodies are new to India and they haven't got many powers - Govt still twists their hands. It will get better with time. <<<
    Appears from your name you love to ogle, (or is that google) you can check that DGH has been around since 1993, DERC since 1998 and CEA has been since 1948. What's has been their achievements other than flattering the crook businesses?


    So, Nothing to bear in mind. Time to have a chilled beer instead....>>>

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  • Originally Posted by harshogle
    Dude, regulators are reality and they are present in every country. Do you know how much work TRAI has done till now to increase teledensity and ending stupid monopoly of BSNL.

    AERC - Can't you see world class airports of Delhi etc. Flight prices are still high because of high taxes on aviation fuel by stupid state government. UDF etc. is only 225-400 Rs. while ATF duties are upto 40%!!

    DERC - Do you know Delhi still has the lowest electricity tariffs? Second, Delhi still has more than 22 hours a day supply, while look at Gurgaon and you will have to cry.

    Also, bear in mind regulatory bodies are new to India and they haven't got many powers - Govt still twists their hands. It will get better with time.


    The quality of regulation has substantially gone down in last decade..due to induction effect of corrupt government.
    The very purpose of establishing these regulators is to make them 'independent' of govt. But instead, all of them are staffed with retired 'babus' who are appointed for their loyalty rather than competence. Just like our PM :)
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  • An issue of suitability for use

    Originally Posted by Magadh_Pride
    And ever wondered why do we need to import coal at high costs when we have the 3rd largest reserves in the world?

    That's another story of cronyism and sarkari inefficiencies


    Much of our coal is very high in sulphur and other impurities. These prevent their use in many cases like in Coking Coal for iron/steel making, etc. Therefore we need to import.

    In a way its like our population (or for that matter even US population). Large in number but largely unfit for use! :(

    cheers
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  • Originally Posted by wiseman
    Much of our coal is very high in sulphur and other impurities. These prevent their use in many cases like in Coking Coal for iron/steel making, etc. Therefore we need to import.

    In a way its like our population (or for that matter even US population). Large in number but largely unfit for use! :(

    cheers


    Bulk of the imported coal is for burning in power plants and not for coking steel. The reason for import is not high sulphur, but low reliability on the in country supply-chain

    Add to that pilferage, transport issues and license-permit raj of securing the captive mine-plant linkages (also known as the coal scam)

    Despite having one of the world's largest reserves of coal, India is unable to dig it up fast enough - Economic Times
    CommentQuote
  • Originally Posted by Mythbuster
    I don't think they are done with the scewing up of nation. Today morning's TOI reading - "Luxury goods to be pricier as govt plans duty hike". Now when govt thinks anybody earning Rs 28 per day is not poor, I wonder what does govt perceive as "luxury goods"! The idiots have lost the plot and this jerk Chidambram knows only one thing - how to ream the middle class for more taxes. From last 7 years he has made life miserable by introducing tax after tax and tax on tax.

    Apart from the obvious corruption in the system which makes doing business in India very difficult, the morons have sucked money from the system via taxation. They have choked the engine of growth. Quite sad that when India was actually shining under ABV, UPA came and eclipsed it.


    Actually, it is the apathy of congress to the situation in India that bothers me. it is one thing to eat up 1% of GDP as bribe. But it is entirely different thing to bring down the entire nation!
    They would have had to work very hard to bring down India to its knees, given that in ABV's regime India was growing 9+% and actually had positive balance of trade ( CAD = 0).
    Wowww !

    Further, MR Chidu is begging IMF now. Please do note that IMF puts a lot of conditions before it gives loans.. What exactly is Chidu thinking..
    CommentQuote
  • Hello to Everyone. This is my first post.

    I think the "Bursting of real estate bubble in India" is a dream that will never happen and my reasons are as below:

    Second Hand Homes
    1. I feel prices are 80% inflated in Indian RE, especially in metros - a 2 BHK which was for about 10 lac in a good place in Delhi around 2004-2005 is about 1 crore now. I have never seen this absurd rise in any other country in such a short span.
    2. As most of the common people, I don't know and don't care about GDP, CAP, liquidity, etc., etc., what I know is what I earn and what I can afford.
    3. There are always buyers who buy at these rates, so why would any one lower the prices. If there is no buyer, then a property dealers buys it and later sells it for more.
    4. Most people who can afford homes have more than one home or good amount of money in banks, that even if they lose their jobs, market crash, etc., etc., they will still not sell their property for less (even I wouldn't do it). They are simply not affected by recession, job loss, etc.
    5. Real estate will come to an affordable level only if a large no. of people lose their income and have no other option to sell their properties to get money - which again seems an unrealistic picture.

    Real estate did crash to this level in US and other European countries, but the major reason was in these countries majority people rent and people who own mostly have only 1 house. If they lose job/income, they have no other option to sell their house or forego to bank as they have little to no money as savings, and there is no one in the market to buy their house at the prices they quote. This is completely opposite in India. Most of the people I know who have homes in India, have more than 1 home. Some who don't, can't even imagine of buying one.

    New Builder Homes, etc.
    1. Same sort of situation as above to some extent.
    2. There are payments to be made to govt., getting licences, bribes to babus, departments, politicians, etc., and then their own absurd profit margins. So, I don't see they will be offering any affordable housing to the general masses.

    For first time home buyers and people who can afford only one house, no matter which era you buy a house, it will be your most difficult purchase and will take a good amount of your life savings; chances are you will and your next generation will keep on paying for that if you mortgage.
    CommentQuote
  • Originally Posted by gaurav000
    Actually, it is the apathy of congress to the situation in India that bothers me. it is one thing to eat up 1% of GDP as bribe. But it is entirely different thing to bring down the entire nation!
    They would have had to work very hard to bring down India to its knees, given that in ABV's regime India was growing 9+% and actually had positive balance of trade ( CAD = 0).
    Wowww !

    Further, MR Chidu is begging IMF now. Please do note that IMF puts a lot of conditions before it gives loans.. What exactly is Chidu thinking..


    Well not exactly true. India grew at ~6% during ABV though the growth picked up to 8%+ during last few quarters of NDA rule. But there is no doubt that PVN and later ABV laid the foundation of high growth by cutting down red tape, financial liberalization, focus on infrastructure and most importantly, fiscal prudence.

    More than the corruption, its the reckless populism that has destroyed India growth story during cong regime.
    CommentQuote
  • Originally Posted by Scorpio74
    Hello to Everyone. This is my first post.

    I think the "Bursting of real estate bubble in India" is a dream that will never happen and my reasons are as below:

    Second Hand Homes
    1. I feel prices are 80% inflated in Indian RE, especially in metros - a 2 BHK which was for about 10 lac in a good place in Delhi around 2004-2005 is about 1 crore now. I have never seen this absurd rise in any other country in such a short span.
    2. As most of the common people, I don't know and don't care about GDP, CAP, liquidity, etc., etc., what I know is what I earn and what I can afford.
    3. There are always buyers who buy at these rates, so why would any one lower the prices. If there is no buyer, then a property dealers buys it and later sells it for more.
    4. Most people who can afford homes have more than one home or good amount of money in banks, that even if they lose their jobs, market crash, etc., etc., they will still not sell their property for less (even I wouldn't do it). They are simply not affected by recession, job loss, etc.
    5. Real estate will come to an affordable level only if a large no. of people lose their income and have no other option to sell their properties to get money - which again seems an unrealistic picture.

    Real estate did crash to this level in US and other European countries, but the major reason was in these countries majority people rent and people who own mostly have only 1 house. If they lose job/income, they have no other option to sell their house or forego to bank as they have little to no money as savings, and there is no one in the market to buy their house at the prices they quote. This is completely opposite in India. Most of the people I know who have homes in India, have more than 1 home. Some who don't, can't even imagine of buying one.

    New Builder Homes, etc.
    1. Same sort of situation as above to some extent.
    2. There are payments to be made to govt., getting licences, bribes to babus, departments, politicians, etc., and then their own absurd profit margins. So, I don't see they will be offering any affordable housing to the general masses.

    For first time home buyers and people who can afford only one house, no matter which era you buy a house, it will be your most difficult purchase and will take a good amount of your life savings; chances are you will and your next generation will keep on paying for that if you mortgage.


    Welcome aboard Scorp :). I must say that you made a big mistake by becoming the member of this forum. It is so addictive that you'll be logging in at least 4 times a day to see what is happening :D. About RE boom and bust a lot has been said. Please spend some time to go through the thread and you'll find a lot of information on why or why not the RE boom is over.

    Let me just add that under normal healthy economic environment, whatever you said is 100% correct. But we are entering a turbulent times which can impact the asset prices in a big way. Stay tuned to know the latest news on RE and economy as the esteemed members share every good and bad news on this thread.
    CommentQuote
  • In USA or Japan also, investors were in to housing big time, hence bubble. In India everyone with spare money is invested in RE. People who can afford RE at current rates due to their income, and who still don't have a house, must be 4-5% of the transactions. Rest is all black money, investors etc.
    Originally Posted by Scorpio74
    Hello to Everyone. This is my first post.

    I think the "Bursting of real estate bubble in India" is a dream that will never happen and my reasons are as below:

    Second Hand Homes
    1. I feel prices are 80% inflated in Indian RE, especially in metros - a 2 BHK which was for about 10 lac in a good place in Delhi around 2004-2005 is about 1 crore now. I have never seen this absurd rise in any other country in such a short span.
    2. As most of the common people, I don't know and don't care about GDP, CAP, liquidity, etc., etc., what I know is what I earn and what I can afford.
    3. There are always buyers who buy at these rates, so why would any one lower the prices. If there is no buyer, then a property dealers buys it and later sells it for more.
    4. Most people who can afford homes have more than one home or good amount of money in banks, that even if they lose their jobs, market crash, etc., etc., they will still not sell their property for less (even I wouldn't do it). They are simply not affected by recession, job loss, etc.
    5. Real estate will come to an affordable level only if a large no. of people lose their income and have no other option to sell their properties to get money - which again seems an unrealistic picture.

    Real estate did crash to this level in US and other European countries, but the major reason was in these countries majority people rent and people who own mostly have only 1 house. If they lose job/income, they have no other option to sell their house or forego to bank as they have little to no money as savings, and there is no one in the market to buy their house at the prices they quote. This is completely opposite in India. Most of the people I know who have homes in India, have more than 1 home. Some who don't, can't even imagine of buying one.

    New Builder Homes, etc.
    1. Same sort of situation as above to some extent.
    2. There are payments to be made to govt., getting licences, bribes to babus, departments, politicians, etc., and then their own absurd profit margins. So, I don't see they will be offering any affordable housing to the general masses.

    For first time home buyers and people who can afford only one house, no matter which era you buy a house, it will be your most difficult purchase and will take a good amount of your life savings; chances are you will and your next generation will keep on paying for that if you mortgage.
    CommentQuote
  • I completely agree on recklesss populism. Isnt it a testimoney that we are so dependent on financing our CAD through foreign flows. A little squeeze on global liquidity and look where rupee has landed and threatened to go down further.

    UPA regime hasn gained from a huge surge in income tax in last 10 yrs. at AB time it was 1lac crore per year , its close to 4 lac crore per year now. Further, Chidu has expanded the ambit of service tax so large that practically everything u consume today, you have to pay consumption tax. With so much of taxation, still CAD is so high. this shows how bad is the economic mismanagement.

    The worst is yet to come....wait for big squeeze in global liquidity and india story wud be over in no time...



    Originally Posted by jaijai
    Well not exactly true. India grew at ~6% during ABV though the growth picked up to 8%+ during last few quarters of NDA rule. But there is no doubt that PVN and later ABV laid the foundation of high growth by cutting down red tape, financial liberalization, focus on infrastructure and most importantly, fiscal prudence.

    More than the corruption, its the reckless populism that has destroyed India growth story during cong regime.
    CommentQuote
  • Originally Posted by Mythbuster
    Welcome aboard Scorp :). I must say that you made a big mistake by becoming the member of this forum. It is so addictive that you'll be logging in at least 4 times a day to see what is happening :D. About RE boom and bust a lot has been said. Please spend some time to go through the thread and you'll find a lot of information on why or why not the RE boom is over.

    Let me just add that under normal healthy economic environment, whatever you said is 100% correct. But we are entering a turbulent times which can impact the asset prices in a big way. Stay tuned to know the latest news on RE and economy as the esteemed members share every good and bad news on this thread.


    Yes, IREF is addictive. Again, I talk of ground reality rather than those high-profile terms. I am presently in UK and have bought a house here, but can't think of affording it in India due to super high prices. Like others have said people who have extra money to invest, black money, etc., they are easily buying. So, they will never sell it for less. A 1 cr. property sold of 90-95 lac is not a price correction. In India, people hoard money, house, gold, etc., but are not ready to sell for less whatever may come. Let see. I only hope people who really need it, should be able to afford it as everyone has a right to a good life and able to afford basic daily amenities.
    CommentQuote