Following is right from todays Sunday TOI Bangalore Edition:

Input costs rise; real estate to be dearer
Bangalore: Property analysts wisdom is that with less demand property prices will drop in the next few months. But developers say rising costs of borrowing and construction input has put pressure on their margins that a 10-15% increase in property prices by year-end is possible.

Normally the price escalation is about 3-4% per annum. But in the past six months, the input costs have risen by 7%. "The average cost of construction has increased by Rs 150 per sqft due to sharp increase in cement and steel prices. We have to pass on the cost to customers" said Sushil Mantri, president of CREDAI-Karnataka on the sidelines of a two-day Credai Realty Expo that began here on Saturday.
.....
....some blah blah...by MDs of some RE firms......
.....
Some visitors to the expo appeared to be in no mood to make a quick purchase. "Though there are some options in the Rs 50-60 Lakh bracket, I'm not sure I want to buy right now. I'm hoping to see a price correction," said Ms Poonam, an IT professional.
For folks like Ms Poonam, Raj Menda, MD of RMZ Corp, raises some hope: The real estate market has a six months lag effect. If the so-called pain continues, developers who are not able to hold out may indulge in price correction by early next year.
-----------------------------------------------------

I can wait for 6 months and more..... :)

Every weekend there is some or other RE expo in Bangalore. This shows how desperate these guys are getting. Till about last year, they were so very arrogant, now if they get your number, they will keep calling you daily and literally pleading.

RE price rises both ways. If cost of capital lowers, buyers rush in and create good demand and so price rises. If cost of capital rises, it makes cost higher for builder - and he CANNOT sell you cheap because his cost is more.

FD is always the benchmark to decide the worth of investment.

FD returns from 2005 to 2010 were quite low and tax inefficient. Hence RE did well.

Now rates of FMP above 10% - likely to rise further (although 2011 govt bonds still at 8.35% only).

Loan rates are some 11% I think?

Property cannot be lucrative at these rates, ever. Same with stocks.

Ball park figures for investment worthiness:

Stock: PE ratio for stock acceptable at 5% FD rate is 20. PE ratio for stocks at 10% FD rate is 10. At 17% FD rate (like 80s) , PE for investment has to be 5 !!!!

RE: At FD rate of 5% Price to rent ratio of 400 is acceptable. We saw that from 2005-2008. At 10% FD rates, price to rent of 300 is acceptable (prime tier 1 city prices only) and at 17% FD rates a price to rent ratio of 200 is acceptable (Indian ballpark figures, not US standard figures).

To make current property prices conform to these ratios, rent has to rise around 100%. I expect it to happen.

Gold is worth investment only at FD rates of around 5% and below (i.e US rates for USD). Gold ceases to be a good investment above 5% US rates.

Works every time. Same as short to long rates - right now our short term rates are 8.25 and long term rates are 8.35. Recession is inevitable - this indicator has worked EVERY TIME IN LAST 100 YEARS - NEVER FAILED

Do you think this will ever happen.. I think bulk of RE have been bought prior to 2006 gallop and rental returns are already high on them..

I know for sure.. that higher the rent, lower is the occupancy. I have always managed to negotiate a property for lower rent after it remains unoccupied for > 6 months..

Rentals are a factor of the current scenario and not really on the ROI working..

Thanks for the excellent analysis Venkytalks.

But I disagree with the rental increase of 100%. Too high rents won't be good for anybody: the renter as well as the owner.

If rental becomes unaffordable, the rents will correct, as owners wouldn't like to keep their property vacant for long. And if renters won't be able to afford the rents, they will look for a place a little far away where the rents are cheap.

And owners cannot sell at high rates, so it will be like something-stuck-in-their-throats, they cannot swallow and they cannot keep. :) . Liquidity is gone. And if the owner has taken a loan, then god only help him.

See, I hadnt entered the time frame for this 100% rise in rents - the input for that is - when the rent rises by 100%, next bull run in property will start.

Probable estimate assuming 7-8 year RE cycle is 2014 or 2015.

I had previously argued elsewhere that in India, we get much prolonged industrial cycle of about 7-8 years and even more prolonged RE cycle of maybe 15 years.

Despite that, I expect rents to be 100% higher than now by 2015.

Last 6 months in Delhi, rents have been firming up a lot. As discussed previously, about 30% rise in rents has happened within last 1 year in the best locations of South Delhi

yeah... thats because end users are postponing their decisions to buy because of affordability issues! this is exactly the same thing happening in US (where economy is still good)... rent rising slowly while house prices dropping or having no offers at all

Translation of expectation into reality is altogether is different prospect, atleast in mumbai i can definitely state this not going to happen, maximum appreciation in rents would be 50% appreciation of current rental prices.

Infact i would not be surprised if rentals stagnate here-on for atleast next 2 years.

In Delhi, rent for flats near mine have moved from 25000 pm to 35000 per month in the last 1 year.

By 2015, Rent of 50,000 pm is quite likely.

I partly agree with Venky. Rents have increased by atleast 25-30% from 2010 level not only in Delhi but even in Noida and Ghaziabad.

Property locations which are in demand are sure going to see rentals up at the same pace but not 100%

Irrespective of what developers say, I think the cost has to eventually be governed by Demand and supply. If the buyer (In general) cannot pay or does not want to pay at the price, does it matter whether the builder has borrowed money at 10% or 25%? I think it is their last ditch effort to scare people into buying.

Investment of the Decade in India

1970s: Gold
1980s: Real estate
1990s: FDs
2000s: Stocks (RE and gold come second and third only in returns)
2010s: ? Real estate?/ remains to be seen.

1980s for Stocks



Best time to get into stocks would have been mid-to-late 1980s.

Then came the Harshad Boom which saw my 80k portfolio shoot to 8 lakhs in only 1.5 years (in those days when practically no asset would give that kind of return, this was a much greater bonanza than it would be today).

1990s was a fairly up-n-down period. 2000s say a 7 times increase in stocks but the real beneficiary would've been those who bought in 80s or even 90s and rode the 2000's bull.

cheers

Even RE gave extremely handsome returns, just depends on location.
Eg: My maternal side had a property in Delhi (Karol Bagh) side on main road and they sold that in 75 lacs in late 2004. Today the property is worth 7+ crores. :bab (38):

And i'm pretty sure that later part of 2010s and then entire 2020s would belong to RE. Though the best part of Future is its Unpredictable. :bab (45):

"The difference between stupidity and genius is that genius has its limits. - Albert Einstein"

We had a similar situation. Back in 2000 Central Chennai property we have was 1.5C. Today, it is 7.5C.

If we were stupid, we would assume that these prices would keep on going up for ever and ever.

Thankfully the Good Lord above intervened twice. First he brought about a litigation which ran till 2008 and stopped as soon as the other party realised that such high prices should be taken advantage of. So, in the period prices shot up, we were prevented from being stupid and selling too early.

Today, He intervenes by getting us to sell of part of it. Again preventing us from being stupid looking for more and more without limit.

As I maintain, much of our sucesses are because of external causes. Much of our failures are because of US!:D

cheers

without doubt theory is proved right. in 2009 i did not have enough cash for downpayment...nd now prices have almost doubled.