September 24, 2012

Property Boom or Bust ?

The Indian Property Market is purported to be in bubble territory since March 2005, when the current UPA government decided to liberalize foreign direct investment norms in real estate on Feb 26, 2005, introduced the SEZ Act in 2005, and allowed private equity funds into real estate. 

Other key factors that contributed to this tremendous growth were ‘lower price’ which attracted buyers and investors not only from India but NRIs & Foreign funds also deployed money into Indian real estate market.

 These new rules ensured that Indian money stacked in Switzerland and other tax havens can be brought back to invest in high yielding Indian property market, away from low-yielding dollar assets. 

This price increase is mostly due to two reason – one primarily in most cases the developers create false claims of overbooking and increase the demand and price and the other reason most of time properties are bought sold within 6–12 months from one buyer to other. There is no system available to the public to track these sells or buys. In US there are lot of real estate website provide the details buy and sell details, what is fair value, when the house was built, how many houses are on sale,etc...

The other factor to consider is cost-to-facility ratio, in Mumbai a 2 bedroom apartment with living space of 1,200 square feet (110 m2) or 1,400 square feet (130 m2) of build up area will cost about 60 Lakhs to 1 Crore or even more, same for other major Indian cities Chennai, Bengaluru, Hyderabad, Pune, Gurgaon,etc.. 

 Where as in US, Australia, UK or France a 3 bedroom/2.5 bath townhouse which is at least 2,000 square feet (190 m2) around most of metros( other than Manhattan and Los Angeles ) will cost between 250,000 USD to 500,000USD which is between 1 Crore to 2 Crore Rs.These houses have parking garage, back yard and with basic Kitchen setup including cabinets, refrigerators, washer and dryer and for higher range may include a private swim pool, basement, front yard.

 In these western countries average salaries are almost 8 times the Indian salaries but cost of house(For a much better house) is only double. Also, compare what you get for your money in Europe or United states with the situation in Indian cities as evidenced by perusing the real estate advertisements. Phrases like "ample water supply" " well ventilated" " with backup generators for power supply" are littered in almost all of these ads. Bottom line is you get basic amenities that are taken for granted in the west for a premium price. Also the Interest rate paid by Indians is almost double that of there developed country pears makes the EMI paid on par with developed countries in many cases.


6 comments:

Sunil Dhawan said...

but coming to those standard would take another decade for India. And by that time the rate will overshoot american property. The real root cause is the way black money is handled in property and gold.

Jigar Dattani said...

For SUNIL dhawan

Property is bubble but as the price are going up and the 98% property are on bank funding this can be dangerous to our economy bank.

As people don;t remember the US and Japan housing bubble. Once the cycle of default start and the property inventories will stay always that might lead to bubble bust in india. This might take time of around more 3-4 yr .but bust is invetiable

JIGAR DATTANI

Jigar Dattani said...

For SUNIL dhawan

Property is bubble but as the price are going up and the 98% property are on bank funding this can be dangerous to our economy bank.

As people don;t remember the US and Japan housing bubble. Once the cycle of default start and the property inventories will stay always that might lead to bubble bust in india. This might take time of around more 3-4 yr .but bust is invetiable

JIGAR DATTANI

Cherrypick said...

I agree completely. The problem with Indian household is they have family pressure in buying a OWN house or flat. In GGN itself (Urban slum: No Water, Electricity or transport and city turns into a big sewer with little showers)the rates are appreciating more than 25% annually for last 3 years atleast. With average salary in corporates of Rs 7-8 lacs how can people buy Rs 70-80 lacs property appreciating by 25% per annum. It will be interesting to see how many people wearing undies when tide goes down, hopefully sooner than later.

Property Broker in Bhopal said...

Nice information...Thanks for sharing it..

Arvind Jain said...

Hi Dhawan Sir

Waiting For Your Input & Update On NIFTY & BSE

Also Waiting For LAST Pick Or Stock To Look For Next One Year So