Thursday, April 17, 2008

Mumbai Realty Slump Becomes Very Real

They may have appeared unfazed, but they now have begun to face reality.

It is good to know that Times Property of April-12, 2008, mouthpiece of Mumbai's housing industry, has acknowledged that there will be a correction, after months of writing that there is no such thing in Mumbai.

The usual suspects quoted in the article also sheepishly accept a correction will happen, albeit they say it will be 15-20% ; at least this is 5% more to their usual cliche of 10-15%. This is a far cry from February 2008, when none of them accepted that a correction is possible.

Now, one can safely assume a expect a 50% correction in the Mumbai real estate markets -- over the next 1-2 years.

Bubbles, housing or any other, are not caused by demand from the consumers, or affordability or the existence of genuine buyers, although these are the oft-attributed reasons for any manic rise. While these factors can be contributors, the single-most reason for bubbles is too much cheap money floating in the markets, with nowhere to go. But money is going to get very expensive in the next 3 months.

The RBI will have to hike the interest rates, because there is no other way to beat the 7% and still growing inflation. The other option is to make the rupee stronger, which the RBI has always been reluctant to do. There is a view that this time both options could be used by the RBI, which can be a double whammy. With interest rates rising, more speculators would exit the markets, and builders would have to pay more on their borrowings, and consumers more on their home loans. Further, a rising rupee would hit US investments in India.

This may also be a reason for a flurry of PE investments in real estate and others in India, rather than being a mad rush for property investments, it may just be a concentration of a closing pipeline of investments, before the RBI raises interest rates and allows the rupee to further increase.

The RBI is in fact facing a piquant situation, where rising import costs are creating havoc for Indian consumers. Already the rising prices of steel and cement are hitting the roof, and those of rice and wheat are hitting the bellies.

Suddenly, the talking heads at real-estate brokers, builders and developers, as well as those who have purchased expensive homes, are now saying the correction is certain, but it will be of a shorter term nature. All of them sound more like a mother comforting her crying baby.

None of us can say how long this correction will last, and none of us know what shorter term means. We have been introxicated with 50% gains in stocks within months, so it is unlikely that our shorter term is going to be more than 3 months.

Essentially this means we are looking in the face of a longer term correction in real estate.

However, irrespective of what the yardstick may be, now not a single builder or broker is denying that we are set for at least a 18-24-month decline in property values. While all are keen on talking about the time, no one is certain about the depth of the decline. At most 20% is being quoted as the outer limit.

The general reasons why builders and brokers are putting on a brave face in Mumbai is that they believe there is a genuine shortage of supply. Fact of matter is, there is no genuine shortage. The shortage has been created by builders hoarding properties. Do a round of any builder in the Andheri-Goregaon belt, and you will see lots of flats which have been "pre-sold" to investors.

Builders also apportioning credit to the High Court order on the private forests issue for creating a shortage of homes. This is completely untrue.

The acute rise in the cost of Mumbai's real estate, as it would be in any other state, is due to a unholy nexus between Maharashtra's politicians, most of whom own swathes and swathes of property, the builders and brokers, and uncontrolled hoarding and cartelization.


Harish said...

Seems to be the period preceding the slump, just like you said. I wonder if this can partly be attributed to the US already withdrawing its investments in light of the strengthening rupee. That may tie in with the terrible US real estate market and the spread of this disease overseas.

Humblybob said...

Despite the slowdown, there have been a slew of investments in SPVs of Indian developers. I was refering to these, when I wrote that there seemed to be a rush in the closing of real estate deals. Citi and AIG have pulled out of Akruti's projects. On the other hand, Lehman and Deutsche have committed to specific SPVs in Delhi. Right now the picture is mixed. I think May-June 2008 is when the real picture would emerge. Point must be noted though, that a slowdown or a slump, does not mean that the industry comes to a grinding halt. Homes will continue to be bought, but I just do not expect that they would be bought without discretion as we saw in 2006-07.

Realty Rider said...

The buildings in Mumbai may be soaring higher each passing day, but the property sales charts in the city are experiencing a slump.
Developers are now bending over backwards to make that sale, and are ready to offer huge discounts freebies such as free parking space and stamp duty payments have become commonplace.In suburbs such as Andheri, Goregaon and Malad builders often offer a 10 to 15 per cent discount on bulk deals. Those discounts could reach 30 or 40 per cent if it will them clinch the deal.A builder might quote Rs 10,000 per square foot. But if you sit across the table with money in hand, he will reduce his price by 30 to 40 per cent.Because the sales have fallen, the rate in some cases rates have gone down by 90 percent in the past six months.In my opinion, overall sales have gone down by 60 to 70 per cent, also in the second-hand property market, sales are down by almost 80 to 90 per cent.The sales slowdown is playing heavy on the psychology of the developers. Even A-grade developers are now calling on brokers with a hope to turn the sales graphs up. But there is no reason for the common man to get worried, as it is the ideal time to cash in on this real estate market slump.For more view-




Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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