Indian real estate – boom or a bubble?

Property prices in India are rising fast, and as the tech boom spreads across the country, and more Indians buy homes,with the growing economy at the rate faster than 8% a year, real estate is attracting more investors, even from overseas

Though India is one of the major countries in Asia with an improving market there are concerns about an asset-price bubble raising questions as to whether the speculation of the past year and a half, which has driven land prices up by 30% to 100% and real estate stocks up as much as 2,000%, may be coming to an end.

Its the boom or bubble question in Indian real estate that has been a cause of worry lately.
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  • Thank you for sharing useful information.We want you to come up with more information so that will be helpful to everyone.
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  • Indian real estate sector has been sluggish in most of the part of the countries since late '07. Though the people at large did not feel the heat of it at early stage but it's clearly visible and the heat of the same is being felt by one and all today.


    Is it the impact of sub prime crisis in U.S.A / global recession alone or there are other factors too? No, some of the other factors which adversely affected the Indian real estate industry are Decreased GDP, Increased inflation, Increase in home loan rates, FDI outflow, Liquidity crunch, job uncertainness, High interest rates in bank deposit and Negative mind set of people at large.



    Though all of the above said factors have adversely affected the real estate industry to a large extent but what I feel that beside the above said factors the Indian real estate industry has been overheated since last 4 years. If one looks at the price appreciation, be it residential or commercial, it has been to the tune of almost 300% to 400% in most of the urban cities.



    If we consider the robust growth in the Indian economy in the last 4 years, then the growth in the real estate sector should have been at the rate of 30% maximum and the appreciation in property prices should have been to the tune of 120% or at the upper side to 150%. Therefore I am of firm opinion that the Indian real estate sector was overheated and a correction was due which has happened.



    The Indian economy has been on a fast track growth after the globolisation of our country since 2000 – 01 and it has been seen that once the economy growth of a country starts, it remains for around next 25 years. Therefore the Indian real estate sector will continue to grow at least for the next 15 years. The slow down of real estate sector at present is not recession but correction. Once again it will bounce back after 1 – 2 years.


    Indianil
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  • Real estate bubble?

    Originally Posted by Indianil
    Indian real estate sector has been sluggish in most of the part of the countries since late '07. Though the people at large did not feel the heat of it at early stage but it's clearly visible and the heat of the same is being felt by one and all today.


    Is it the impact of sub prime crisis in U.S.A / global recession alone or there are other factors too? No, some of the other factors which adversely affected the Indian real estate industry are Decreased GDP, Increased inflation, Increase in home loan rates, FDI outflow, Liquidity crunch, job uncertainness, High interest rates in bank deposit and Negative mind set of people at large.



    Though all of the above said factors have adversely affected the real estate industry to a large extent but what I feel that beside the above said factors the Indian real estate industry has been overheated since last 4 years. If one looks at the price appreciation, be it residential or commercial, it has been to the tune of almost 300% to 400% in most of the urban cities.



    If we consider the robust growth in the Indian economy in the last 4 years, then the growth in the real estate sector should have been at the rate of 30% maximum and the appreciation in property prices should have been to the tune of 120% or at the upper side to 150%. Therefore I am of firm opinion that the Indian real estate sector was overheated and a correction was due which has happened.



    The Indian economy has been on a fast track growth after the globolisation of our country since 2000 – 01 and it has been seen that once the economy growth of a country starts, it remains for around next 25 years. Therefore the Indian real estate sector will continue to grow at least for the next 15 years. The slow down of real estate sector at present is not recession but correction. Once again it will bounce back after 1 – 2 years.


    Indianil

    Dear indianil,

    I wish you and all other members, guests of the forum, a very happy and prosperous New Year 2009.
    Your views are interesting to read. As long as the RE in India is in the hands of black money, politicians and biggies patronising the field, any downtrend seen now or in the coming 6 to 12 months, can be a temporary phase, which will become normal ( normal here, I mean is - increase of about atleast 15 to 20% plus every year ). What is happening outside India, cannot be expected to happen here. That is why, I say, no investment made now or any time, is a bad invesment in the long run, seen in a longer, say, 5 year or more perspective. One, will sure, end up with a minimum average return of atleast 12% per annum cumulative in the long run, though not higher.

    ks2071746
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  • The real estate segment from Americas to Europe is going under. The real estate prices in USA are down 18% from last year. In some key markets where the home prices went up just like India (upward of 40%/year) such as Las Vegas, San Francisco, Miami, the prices have actually gone down by 30%+. The trend is still pointing downward even when the mortgage rates are at 4.5%. Comparing these, the rates in India are still considerably higher. Spain has worst real estate bubble in Europe and its property prices still did not rise as fast as India’s. Spanish real estate is expected to start stabilizing (not recovering) in 12 to 18 months.
    Before you invest in real estate, consider the following facts:
    1.Job Losses: Job losses are still happening and will only accelerate in 2009 with projected 1 million job losses/month only in United States. Indian industries such as IT, BPO, Textile are still 60%+ dependant on USA.
    2.Europe is still struggling with several of its large economies (France, Germany, Italy, UK etc) have negative growth projections for 2009. If you think it’s not bad, know it that they had positive growth in 2008. They think it will be bad for them; we are dependent on them, what makes us deferent?
    3.Japan went into slowdown in 1990s and till date it hasn’t gotten out of it. It’s the second largest economy in the world. Toyota (one of the world’s strongest companies) has posted first loss in 71 years.
    4.Economists are not simply calling it a recession but a depression. Do a brief read up on what happened during depression of 1930s and 1970s. It’s not pretty.
    5.If you are investing in real estate for purely investment purposes and not to live, put yourself in the shoes of real estate speculators in Las Vegas and Miami. See if you can sit on the house seeing its value depreciate when you could have invested in more productive assets.
    6.We had a brief primer in real estate fall in Mumbai in the 1990s. Learn from the people who got burnt.
    7.Fall in Commodity prices including the price of Crude Oil (Major and probably the only source of income in Gulf countries) is having an adverse impact on the boom that was there. So there would be job losses in Gulf countries as well. Remember OPEC has been meeting consistently and talking about reducing the oil production.
    8.China with its vast foreign exchange reserve is still not able to maintain its growth rate. Its projected growth rate for 2009 is 6%. Some time back Chinese officials claimed that growth rate below 8% is devastating for China’s internal peace. This is even after the fact China has offered the stimulus package worth $586 billion (compare that to India’s $4 Billion).
    9.Satyam-Maytag Deal: Remember how wholeheartedly investors dumped the Satyam stock? They wouldn’t have down that if they saw value in the real estate segment.
    10.Remittances from NRIs: Remittance from NRIs would certainly be down because NRIs just don’t print money. They still have to have a job and a sense of security to keep sending money home. If I was keeping $15,000 with me before, I would be at least saving $10,000 + cost of living for 6 months before sending a dime to invest in speculative real estate.

    I am consistently getting emails from real estate companies/agents/dealers saying that now is time to buy and we have reached the bottom. My response to them is rest of the world’s economist with 100+ years of financial data analyzed are still not in a position to call the bottom.

    The 3 biggest buyers of real estate in India were:
    1.Well to do professionals such as IT people, BPO people, people with higher salaries (above 10-15 lacks/year) specifically employees of multinationals.
    2.Business owners and people with black money investing in the real estate to hide the income.
    3.NRIs who intend to either live (some day) in India and NRIs who thought that real estate in India would earn them more returns than in their countries of residence.

    The banks which were lending to buy the real estate are suffering themselves from the tightened

    The banks which were lending for the real estate purchase are themselves suffering from the credit crunch. The banks will soon be too reluctant to lend (even though the interest rates are down, where is the money to lend?) and will be lot stricter in their lending.

    Now coming back to the 3 types of borrowers:
    1.IT/BPO/MNC employees: Their jobs are on the line in 2009/2010. Those with job are not guaranteed that job when the sheet hit the fan in 2009/2010. Even if they have cash at hand, they will be reluctant to make the move. The laid off people will find it difficult to make payments and houses will be repossessed. These people once burnt, will be very slow to come back to real estate market.
    2.Business owners will find their lines of credit affected due to credit crunch and/or their sales down. How long will they just sit on the property if the value keeps dropping? They still need to capital to keep the business running.
    3.NRIs: NRIs have already lost 20% of their investment even if the house prices didn’t drop. This is because Indian Rupee has dropped 20% compared to US$. Remember, NRIs realize their gains in their country of residence. It’s worst for NRIs than the other 2 groups combined.

    If you think about it, worst has not even started yet. You will see it start when builders who borrowed from the banks are not able to make good on their payments, large number of houses and businesses will be repossessed, builders will start selling under the cost just to get rid of the inventory and speculative investors will rid themselves of the un-needed properties.
    I am not trying to discourage everyone from the real estate. I am one of the people still holding the house and few other properties in India. I was lucky to offload a few of them in August but I am still left holding the bag on few others. The only people who should be buying right now are those who can justify rent vs. buy equation and have guarantee of source of income. If you do not understand that equation, read up on it.

    Real Estate is an investment of life time, don’t fall for the hype.
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  • Originally Posted by vardaan
    Indian real estate – boom or a bubble?

    Property prices in India are rising fast, and as the tech boom spreads across the country, and more Indians buy homes,with the growing economy at the rate faster than 8% a year, real estate is attracting more investors, even from overseas

    Though India is one of the major countries in Asia with an improving market there are concerns about an asset-price bubble raising questions as to whether the speculation of the past year and a half, which has driven land prices up by 30% to 100% and real estate stocks up as much as 2,000%, may be coming to an end.

    Its the boom or bubble question in Indian real estate that has been a cause of worry lately.


    I really enjoyed this. where can I find more info about this.
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  • Now I'm retiring :)

    Originally Posted by nick_alan_76
    The real estate segment from Americas to Europe is going under. The real estate prices in USA are down 18% from last year. In some key markets where the home prices went up just like India (upward of 40%/year) such as Las Vegas, San Francisco, Miami, the prices have actually gone down by 30%+. The trend is still pointing downward even when the mortgage rates are at 4.5%. Comparing these, the rates in India are still considerably higher. Spain has worst real estate bubble in Europe and its property prices still did not rise as fast as India’s. Spanish real estate is expected to start stabilizing (not recovering) in 12 to 18 months.

    ...on few others. The only people who should be buying right now are those who can justify rent vs. buy equation and have guarantee of source of income. If you do not understand that equation, read up on it.

    Real Estate is an investment of life time, don’t fall for the hype.



    Hi Nick_alan,

    Just a small correction.

    The most used index for home price correction is the Case-Schiller Index. There are 2, the 10-City and the 20-City index.

    Latest on that: 20-City index is down 23% from peak. The worst state is California where the average decline in home prices across the entire state is 52%!!! In some counties the average decline has gone upto 60%+. So, it is already the most severe decline ever in the History of the US.

    And with others posting such long and informative posts, I'm retiring :D!

    cheers
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  • Yes really now days the real estate development companies playing a bigger role in an Indian realty market. They together with the architects, engineers have been successful in bringing about a revolutionary change in the real estate market in India.
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  • revolutionary change

    Originally Posted by jemas
    Yes really now days the real estate development companies playing a bigger role in an Indian realty market. They together with the architects, engineers have been successful in bringing about a revolutionary change in the real estate market in India.


    You partially right.

    At the same time RE companies together with Engineers and Brokers , have rigged the prices to the level that common man can NOT afford . Also they have gone into big expansion plans and only the continued sales will save them .

    Will they sell the houses at this high prices and meet the recurring the payouts ?

    Cheers
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  • Don't retire Wiseman...

    Originally Posted by sethugm

    At the same time RE companies together with Engineers and Brokers , have rigged the prices to the level that common man can NOT afford .

    Cheers


    Well said sethugm. The per capita GDP in India is less than $1000 (this is nominal GDP and not in PPP). That is less than Rs. 40,000/person. How many common people in India can afford to buy the houses at such inflated prices. RE companies/Brokers etc went overboard to build a lot of homes. This excess supply of homes is going to come back to bite them in their behind.

    Pricing out the common man from the boom will be a curse for India... it leads to rampant corruption, crime and social unrest (if you think we do not have them already)

    Here is another link that just goes on to prove that lots of loan defaults are coming and mess has just began.
    http://economictimes.indiatimes.com/Personal_Finance/Lower_home_loan_exposure_advisable/articleshow/3939910.cms

    Wiseman: Please rethink about retiring. I think there are lot of people on this forum still in denial. We need all resources we can to cool down the madness.
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  • Just kidding! :)

    Originally Posted by nick_alan_76
    Well said sethugm. The per capita GDP in India is less than $1000 (this is nominal GDP and not in PPP). That is less than Rs. 40,000/person. How many common people in India can afford to buy the houses at such inflated prices. RE companies/Brokers etc went overboard to build a lot of homes. This excess supply of homes is going to come back to bite them in their behind.

    Pricing out the common man from the boom will be a curse for India... it leads to rampant corruption, crime and social unrest (if you think we do not have them already)

    Here is another link that just goes on to prove that lots of loan defaults are coming and mess has just began.
    http://economictimes.indiatimes.com/Personal_Finance/Lower_home_loan_exposure_advisable/articleshow/3939910.cms

    Wiseman: Please rethink about retiring. I think there are lot of people on this forum still in denial. We need all resources we can to cool down the madness.


    Hi Alan,

    Just pulling leg. With Natraj around you do need adequate firepower to attain balance of power, right?

    Anyways 2 things to support your figures. I just saw a REO - for the uninitiated, this means Real Estate Owned another way of saying that the bank now owns it and is eager to dump - that was originally sold in 2007 for $930,000. This was on 2 acres in a prime area in California and has a 4400 SFt house with all the bells and whistles; replete with Granite Tops, etc.

    Guess what price its going at now and is still in the market for 7 months. The asking price is $540,000.

    The point I'm trying to make is this. Even at the height of the boom a luxury house in a prime area was available with building and land in the US of A for only Rs.535 per SFt. Today, its going begging at Rs.310 per SFt.

    And in a country with a per capita income only a fraction of the USA, you have land going at Rs 10000 per SFt (32 times). Hope everyone thinking of buying now - in the hope of finding a greater fool down the road - gets this into their heads properly!!!

    Regarding the article linked
    I had already made several mentions before that it only takes a 15% - 20% drop in price to have a majority of people with home loans to go underwater / upside down - meaning loan outstanding is > value of home. If they also simultaneously have income drop and are not able to meet payments, poof, home as well as down payment is gone (which, in most cases is entire life-savings). This is an overhang which could be catastrophic in the next few months as job losses hit seriously.

    Just heard a senior MNC IT company friend tell me that his main job now-a-days is to fire people and this is only the first round. Company has 10000 currently in India and first round is expectted to take out 10%!!!

    Did you see the Satyam Catastrophe? WOW!!!

    This too could see a drop in outsourcing - Obama and gang will only use this to blow-up the evils of outsourcing to India and make their case stronger! Brace yourselves for serious job losses and do not take any debt of any kind next year or two!!!

    cheers
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  • Yes I saw what happened to Satyam. World Bank has already barred the company for eight years from bidding for contracts. After this fiasco other clients will certainly be moving their business elsewhere. DSP Merrill has already washed their hands off of Satyam. Credit Suisse suspended its coverage of Satyam. But more is yet to come. The best case scenario is that it will be acquired by a larger competitor and would retain at least 60% of the work force. See, it's already relevant to my previous post about 1st type of potential buyers.

    This fiasco will have adverse impact on all Indian IT/BPO companies as they will have to prove that they are not in the same boat. One more fiasco and have a close case. As you already stated, questions are already being raised on the overall Indian accounting standards. This will affect the amount of new business Desi companies get. This is really a sad day for India and I am not happy to write about it. But it’s just a last ditch effort to warn as many people as possible.

    Now as you stated, even a drop of 20%-25% in RE prices will start the slide. Now let me analyze how this will start. Satyam and other IT/BPO companies already had expansion plans in tier 2 cities. This more than doubled the RE prices in those cities overnight. These companies will be moving into operations mode and may eventually scrap those plans for tier 2 cities if the RE drops in tier 1 cities itself. This has a cumulative effect of RE drop in tier 2 cities itself. It’s a self sustaining cycle.
    This is first downturn in India which will touch lives of so many ordinary citizens. Remember the Harshad Mehta scandal and 1990’s drop in RE prices in Mumbai. Those will look like wet dreams as compared to what we have on the horizon.

    Come to think about it… some more people need to buy some plots in the tier 2 cities so I can offload some of my real estate investments as quickly as possible. I wouldn’t bet my lunch money on it though.
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  • More way to come man !!! Satyam is just start of the Beginning...
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  • wiseman the prophet

    dear wiseman ,
    all your words are coming true. Satyam is just a beginning of the end of the long bull ride we had so far. more scams will be unearthed. satyam employees who have taken housing loan will default. which company next?
    may be infosys who knows. the prophet wiseman is requested to continue his good work to society. pl dont retire
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  • The beginning of the end of the so-called BOOM!

    World financial sector collapse: NRIs cannot buy properties as fast as earlier.

    Mumbai blasts, Satyam collapse: more layoffs and uncertainity, local IT guys hold back...

    Get ready for the 'Foreclosure Crisis' in India....:(
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  • Outsourcing?

    I checked various message boards discussing the financial mess and associated job losses in USA. It confirms that they had worst job losses since WW2. And as you stated Wiseman, people are already talking about Outsourcing and its impact on the overall US economy (people losing jobs and not being able to make mortgage payments and shopping less… that leading to more retail sector jobs… So one big spiral). This anger will certainly affect new contracts coming into India. Textiles are already hurting and mineral/raw material exports are suffering due to fallen commodity prices (although I believe that will be short term).
    In today’s news, Satyam has told the employees that it will hold their salaries for 2 months (wonder what do they have planned in the 3rd month?). Their monthly employee expense obligations are upward of Rs. 500 Cr. Their cash reserves don’t justify 53,000 employees unless there is huge cash injection (question is who will lend them money?). So they are back to being target of acquisition and associated job losses. This will also affect the PwC staffers in India in that PwC’s other clients will look elsewhere for their auditing needs. Also if you do not know, check with Infosys/Wipro/TCS friends about how many people are on bench (not actively generating revenue for the company). That number has gone up a lot. Remember, the people holding these kinds of jobs were the largest group of people buying expensive RE (besides the NRI which we already spoke about).
    Maytas seems to be in equally bad position. Wonder what happens to them. I heard that they were in the Infrastructure development. If true, it will affect infrastructure work in Hyderabad and that’s bad for the RE prices there (at least for sane people). The stagnation of Infrastructure building in India is my biggest concern and will affect the bounce back of Indian economy (Any politicians reading this? Please do something about this).
    The joke about building Rs. 80L houses/apartments 40KMs from Bangalore border is coming to an end. With shrinking job market and falling/stabilized salaries, who (in their right mind) would plan on commuting that distance with his/her on conveyance?
    BTW, did you guys know that Microsoft (which employees a large number of NRIs), a bellwether company which did not do layoff in the tech bust of 2001 has indicated that they are planning for 15% workforce reduction?
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