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Builders & Real Estate Bulls Theory Proved Wrong

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Builders & Real Estate Bulls Theory Proved Wrong

Last updated: November 1 2016
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  • Re : Builders & Real Estate Bulls Theory Proved Wrong

    Housing Finance Problem or Solution?

    In the 1960s if you wanted to buy a house, it was considered almost impossible to get a home loan. It was only in 1980 that Hdfc started giving home loans – and that too sensible amounts. That explains why Hdfc is so popular – people love the guys who gave them the HOME. Especially the first home.
    However, reflect a little and you keep wondering how much is a problem, and how much is a solution is difficult to fathom. State Bank of India recently announced a home loan book of Rs. 100,000 crore. If that is the size of SBI’s share, then the whole market should be about Rs. 250,000 crore. This is not a small market by any stretch of imagination.
    This should normally have created a big booming housing market all over the country….right?
    It has not created supply. It has created a skewed market where you have the bigger cities on one side with very high prices. It has also not increased supply of housing in the smaller towns or even in the bigger towns.
    Is there a solution to this? No. Not really.
    Ownership is still cherished – so people will buy beyond their ability to buy and keep driving the prices up.
    Surprising that big infrastructure companies have not thought of colonies on rent. Imagine a big company sets up a factory or an office 100 kms away from Ahmedabad. If L&T decides to buy about 400 acres of land and decides to construct houses – 1, 2, 3, 4 bhks – and gives it on rent to the people coming there, there will be no need for the employees to buy a house.
    So slowly a guy goes from a 1 bhk to a 2 bhk on getting married, and eventually to a 4 bhk when his needs are at its peak.
    Why does this not happen? Because funding is difficult to get for such a project. It is a project with an excellent IRR (remember there are enough people saying real estate prices cannot fall??).
    How will the prices in the cities come down? Simply by improving the taxation system. If the richer areas with bigger flats started paying for everything on a cost plus basis, people will not want to buy in those locations. We have a very regressive tax system. The rich man gets subsidised water for washing his car!!
    Put a ‘luxury tax’ – on the property tax for properties above say Rs. 2 crores, and you will see prices arbitraging. …..hmmm…

    Comment


    • Re : Builders & Real Estate Bulls Theory Proved Wrong

      As I have already been saying for a some time now

      Originally posted by AJAY_GGN View Post

      This whole home financing is a gigantic scam to take home prices to unrealistic levels by the Builders and Banks over a long period of time. Actually it has now morphed into luxury car purchases (where cars today cost more than home 10 years back!) holiday loans (sometimes these cost as much as high-end cars) and so on ...

      This is our own RE (financial) bubble and the only reason it has not burst is our main source of income for the Debt slaves (home owners on high debt) - JOBS - continue to remain intact.

      I suspect, when the real collapse in the developed (West) countries happen and recovery takes a long time, our job scene will also take a hit (it won't collapse but will grind down significantly downwards over time) and then we will see a double whammy of home sales dropping and remaining low as well as bank-owned homes coming to market in auction.

      When you couple this with the steep increase in all resource prices, we may also be near the peak in resources of all kinds.

      We may be near the peak in home prices and this bear market in homes should continue for few years to come. The crunch will really be for people not able to pay their EMIs. Rest should see some declines in home prices but should be okay otherwise.

      cheers

      Comment


      • Re : Builders & Real Estate Bulls Theory Proved Wrong

        very very cool and interesting points......am sure builder will blink first

        Comment


        • Re : Builders & Real Estate Bulls Theory Proved Wrong

          I agree that we are looking at a bubble but seriously doubt if it is big enough to be uncontrollable so as to hurt even the good assets. Mumbai is a live example, you have seen lower launches, no sales/re-sale for more than a year now but prices have not come down either in primary or secondary markets. Below are my views

          1. Income growth and new income opportunities is one of the key reason for the supply - Agree, real estate in India is unaffordable to majority of people and part of it is because of nexus, hoarding etc of real estate space. But, we are living in high growth high inflation environment which in itself require a healthy 14-15% growth (~7%GDP growth + 8% inflation) in real estate prices just to be inline with economy growth! (Just imagine how our definition of affordable house shifted from 30-40lacs in 2006 to 60-70lacs in 2012!)

          2. And current supply is only for the affluents for whom affordability might not as bad - If we look at the whole real estate situation from a birds’ eye view. The focus (of developers) now seems to fulfill housing demand for the top most part of the social pyramid where margins are higher even though volumes are lower. That is precisely why house seems expensive to most of us!

          3. Prices should stabilize once demand from affluents loose shine- In the longer period of time, when the requirement of houses at premium end goes down (may be in another year or so, my guess). The marginal utility for a developer to contioue building premium homes (at the cost of potential mid-income houses) would go down. And hence he would be structurely forced to shift to the mid-income (hassle free) houses.

          A lead indicator of this could be drop in margins for the developers (suggests limited scope for price rise and lesser incentive to remain at premium houses). We are already seeing this happening for most of the developers! Also, entering of Godrej and Tata may push this case as well!

          This should have happened by now, but (in my view) the fast pace of economic growth and income/salary of a select group of people in India pushed the demand from affluents and hence the delay.

          4. Do we think there is gross oversupply in India? May be yes for high end ones but no for mid-income houses (~50lacs in suburbs of Tier 1 cities). Below is a brief explanation for the same

          How much is the supply
          A. The 4 biggest cities in India Gurgaon, Mumbai, Bengalore and Chennai (knowingly excluding Gr Noida) adds ~160msf of development space or ~110k houses per year. If I were to extrapolate this to the whole of India's urban area it could be 2x or 220k p.a.. So we get the supply of house in India
          Supply of house in India – approx 220k houses per annum

          B. Of the total population of 120cr, total working population would be say 60% and of these, say only 30% would be able to afford a house over next 10 years (a new joinee in a IT company should normally have enough cash to pay down payment in 5-7 years of his job, plus there will be increments etc). Thus we get potential demand of 22cr houses (120cr x 60% x 30%) over next 10 years (agree the affordability will be different for each of these guys).
          Demand of house in India – approx 22cr

          C. Comparing A and B above , we should not be in a grossly over supply situation in India if even 10% of above (22cr) need a new house to live in whether he buys it or rents it! In other words, the new housing stock is equal to 0.2% of the top 5% of India’s population.

          All that I infer of this is that we are still seeing a lot of growth in India where cities are being built, and a number of triggers are forcing housing needs (urbanisation, industrialisation etc) and the bubble might be way too small that it bursts and hurt the majority of people.
          Har Jagah Gyaan bat raha hai....Jo achha lage utha lo!

          Comment


          • Re : Builders & Real Estate Bulls Theory Proved Wrong

            Few facts
            75 % of indian population lives in villages
            60% population depends directly on agriculture
            people between ages 16-64 : 63%

            .. and 30% can afford houses???

            Originally posted by arunaggarwal View Post
            I agree that we are looking at a bubble but seriously doubt if it is big enough to be uncontrollable so as to hurt even the good assets. Mumbai is a live example, you have seen lower launches, no sales/re-sale for more than a year now but prices have not come down either in primary or secondary markets. Below are my views

            This should have happened by now, but (in my view) the fast pace of economic growth and income/salary of a select group of people in India pushed the demand from affluents and hence the delay.

            ..
            B. Of the total population of 120cr, total working population would be say 60% and of these, say only 30% would be able to afford a house over next 10 years (a new joinee in a IT company should normally have enough cash to pay down payment in 5-7 years of his job, plus there will be increments etc). Thus we get potential demand of 22cr houses (120cr x 60% x 30%) over next 10 years (agree the affordability will be different for each of these guys).
            Demand of house in India – approx 22cr
            .
            .
            .
            All that I infer of this is that we are still seeing a lot of growth in India where cities are being built, and a number of triggers are forcing housing needs (urbanisation, industrialisation etc) and the bubble might be way too small that it bursts and hurt the majority of people.

            Comment


            • Re : Builders & Real Estate Bulls Theory Proved Wrong

              Originally posted by sheeshu View Post
              Few facts
              75 % of indian population lives in villages
              60% population depends directly on agriculture
              people between ages 16-64 : 63%

              .. and 30% can afford houses???
              Agree I might be a bit more aggressive on these assumptions, but even if you take lower numbers the gap shouldn't be very high. As I clearly said earlier, don;t think there is gross over supply on PAN -India basis (demand is there though may be at a lower price levels). Below are my explanations

              Few facts
              75 % of indian population lives in villages - Agree, and a) we are seeing strong Urbanisation happening across country, b) with better connectivity these villages are coming closer to the cities (I know a lot of people from Alwar come to Gurgaon/delhi on daily basis). They will create demand for housing in these cities may be not now but over next decade

              60% population depends directly on agriculture - The % of people dependent on agriculture is sliding down over years and is expected to remain so in coming times...right? Also, we are talking about demand for next 10 years and we should factor-in the changes which may impact our society including industrialisation (see how villages in Gurgaon or Manesar or neemrana/bhiwadi have changed over past decade)

              people between ages 16-64 : 63% - Exactly this is the number we are taking for % of people who would be working

              .. and 30% can afford houses??? - Yes my assumption is that with growth in general income levels, atleast 30% of the people already working today should be able to upgrade themselves for a new house in a span of 10 years.

              May be I am totaly wrong on these assumptions but my only point is that we are in times when growth is high. And this growth and hence accumulation of wealth in the hands of few has led to high prices in the past.

              In my view, this growth and hence more people coming to mainstream may keep the prices from falling in the near-mid term though it is in-evitable in the long term considering it is not a productive asset.
              Har Jagah Gyaan bat raha hai....Jo achha lage utha lo!

              Comment


              • Re : Builders & Real Estate Bulls Theory Proved Wrong

                Originally posted by arunaggarwal View Post
                Agree I might be a bit more aggressive on these assumptions, but even if you take lower numbers the gap shouldn't be very high. As I clearly said earlier, don;t think there is gross over supply on PAN -India basis (demand is there though may be at a lower price levels). Below are my explanations

                Few facts
                75 % of indian population lives in villages - Agree, and a) we are seeing strong Urbanisation happening across country, b) with better connectivity these villages are coming closer to the cities (I know a lot of people from Alwar come to Gurgaon/delhi on daily basis). They will create demand for housing in these cities may be not now but over next decade

                60% population depends directly on agriculture - The % of people dependent on agriculture is sliding down over years and is expected to remain so in coming times...right? Also, we are talking about demand for next 10 years and we should factor-in the changes which may impact our society including industrialisation (see how villages in Gurgaon or Manesar or neemrana/bhiwadi have changed over past decade)

                people between ages 16-64 : 63% - Exactly this is the number we are taking for % of people who would be working

                .. and 30% can afford houses??? - Yes my assumption is that with growth in general income levels, atleast 30% of the people already working today should be able to upgrade themselves for a new house in a span of 10 years.

                May be I am totaly wrong on these assumptions but my only point is that we are in times when growth is high. And this growth and hence accumulation of wealth in the hands of few has led to high prices in the past.

                In my view, this growth and hence more people coming to mainstream may keep the prices from falling in the near-mid term though it is in-evitable in the long term considering it is not a productive asset.

                -I think you are way off the mark here! Even in a city like pune which has very good per capita income, about 60-65percent people live in slums! Amongst the rest 25 percent people who live in houses(might be pukka houses or apartments or xyz) cannot even think of buying a new house. We are remaining with the other 10percent for whom prices are going out of reach. So probably the top 1-2percent people can actually afford these houses comfortably. Some of these guys can afford 10 houses as well. These are the people you interact with on a daily basis(The top 10 percent maybe). And hence you are thinking that 22cr people can actually afford houses. Maybe in the next 10 years 22cr people can afford houses below 15laks!!!

                Comment


                • Re : Builders & Real Estate Bulls Theory Proved Wrong

                  Originally posted by y2monesh View Post
                  -I think you are way off the mark here! Even in a city like pune which has very good per capita income, about 60-65percent people live in slums! Amongst the rest 25 percent people who live in houses(might be pukka houses or apartments or xyz) cannot even think of buying a new house. We are remaining with the other 10percent for whom prices are going out of reach. So probably the top 1-2percent people can actually afford these houses comfortably. Some of these guys can afford 10 houses as well. These are the people you interact with on a daily basis(The top 10 percent maybe). And hence you are thinking that 22cr people can actually afford houses. Maybe in the next 10 years 22cr people can afford houses below 15laks!!!
                  No actually I am not actually looking at it that way.... just trying to draw attention towards the impact of growth on the way people live, save, spend and percieve affordability.

                  I completely agree that there is disconnect between the price level at which there exists demand for housing and the levels at which current prices are. BUT the key is that the economy is generating more wealth in the hand of incrementally more people and this should keep the prices at high levels even if there is supply/demand issue at micro market level.

                  On your comment of 22cr people being able to afford a house in 10 years...please be clear that I was talking about this much people will be able to afford to buy or rent a house...... My clear view here is that for any house which is being bought today (by investors), there will be demand for that house till there is someone willing to stay in it and we won't have ghost town!!

                  You may disagree on the quantitative assumptions and I respect your POV but I am not saying anything just for the sake of saying so!
                  Har Jagah Gyaan bat raha hai....Jo achha lage utha lo!

                  Comment


                  • Re : Builders & Real Estate Bulls Theory Proved Wrong

                    Don't think I'm attacking you, but ...

                    Originally posted by arunaggarwal View Post
                    No actually I am not actually looking at it that way.... just trying to draw attention towards the impact of growth on the way people live, save, spend and percieve affordability.
                    Arun,

                    Do not take this post as yet another attack on you (it seems every one is attacking you! ), but in my opinion, the salary hikes in some segments have already taken our salaries levels to unrealistic and unsustainable levels - I'm talking s.oftware mainly.

                    I do not see jobs scaling as fast as in the pst 1-2 decades, nor salaries.

                    In addition, due to fiscal imbalances, I see the rupee continue sliding to possibly reach 85-90 per $$$ in the next year or two as well as our constantly migrating population put urban India into controlled chaos.

                    There is a reason for rural folk to migrate to urban areas. They are not able to survive in their present circumstances. When they realise they will not be able to do any better in urban areas, you can imagine what will happen to this country.

                    The future looks very challenging at the minimum. What do you think will be the impact of a fast-depreciating rupee, a challenging job-growth scene, a fall in real wages for most Indians and a bubble RE scenario?

                    All in the context of a Global Recession (and possible depression) that could easily last a decade! I'm not even bringing in the possibility of a 4-5 year drought period in countries like the US and a slowdown in agricultural land yield in countries like India - remember the Green Revolution is around 40 years old by now and we haven't seen another such on the intervening years!

                    Come to your own conclusions on sustained increase in RE prices in the future.

                    cheers

                    Comment


                    • Re : Builders & Real Estate Bulls Theory Proved Wrong

                      No offences on this....It is good to have healthy discussion around our views....!!

                      Respect your view and can't disagree that we are headed for a tough tomorrow if economic issues worsen from here.....!!

                      On my post, my basic assumptions here has clearly been that we should come out of this mess in the time to come and hence the conclusion that I had...... and this was primarily because a) even in today's bad times, we are talking of a GDP growth of 6% with inflation of 7-8% (nominal growth of 13-14%), and b) a few positive reform steps from govt now can give some impetus to weather the key risks of global issues and depreciating rupee !!!!

                      Given there are basic difference in assumptions, these different POV are bound to come!
                      Har Jagah Gyaan bat raha hai....Jo achha lage utha lo!

                      Comment

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