Friday, May 16, 2008

Indian Real Estate: Bubblicious as Any Other

So, how many times have you been told that the Indian real estate market is different? How wonderful you felt when price of apartments in Mumbai tripled, or prices for plots jumped 20 times in Chennai. Then, you took a loan from the bank last month and picked up an apartment, hoping the rent would pay off the EMI, and you would be sitting pretty with property for which over 20 years you would have paid 50% extra as bank interest. A good idea, if markets were headed just one way. Ironically, they do not, and if we look anything similar to the UK market, we should be headed down at least 30%.

A study conducted shows Indian real estate has been no different from any other in the world, especially the UK. As an overhang of the Raj, we seem to have replicated the UK real estate with some lag. Look at the chart below. This was the UK real estate market.

From the low in 1995, the average UK house price has risen from £50,930, to the £158,745 by the end of 2005, which is more than tripling in price. From peak to to peak, House prices have risen about the same 50%, as when the peaked in 1990. The trend analysis suggests any decline could take house prices to the previous peak of approx 105k, which would represent a staggering drop of 34% off current prices. For those who follow technicals, India has behaved exactly like this, then it's time for a 34% cut from today's prices.

A respected analyst friend of mine, said that tops in real estate prices, are not the same as they are in stocks. An peak and exhaustion in stock prices is usually represented by a spike, and then a drop, whereas a peak and exhaustion in real estate is represented by a plateau. This plateau has been reached in India, and should be construed as a top. In most cases, technically, real estate prices correct at least 30%, irrespective of what anyone says.

Considering some offers being made in the Indian market by brokers, who are encouraging clients to purchase apartments, at any price, with a suggestion that they need not be registered, since 3 months later they can be sold to some greater fool for a 40% markup. In most cases, such behavior of excess leverage is seen at tops in stock markets, and these suggestions can be equated to top-like behavior in real estate. Now for the 35% correction.

Read the Market Oracle article here

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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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