The numbers when it comes to real-estate just don't add up though. Real-estate in India is incredibly expensive and not just by Indian standards (with per capita GDP of US$ 700 per annum). Here are some numbers:
- Condos in New Delhi, India: 2-bedroom, 1000 sq ft apartment for $200,000. [$200 per sq ft] (Source: 99acres.com)
- Condos in Chicago, USA: 2-bedroom, 1000 sq ft apartment for $400,000 [$400 per sq ft] (Source: Google Housing)
Next, look at agricultural land prices.
- Agricultural land in Faridabad, Haryana (adjacent to New Delhi much like New Jersey is to New York): $250,000 per acre (source: 99acres.com)
- Agricultural land in New Jersey: $12,000 per acre (source: USDA, and for comparison its $6,000 per acre in California and $8,000 per acre in Florida)
The issue of population density pops up every time I discuss this. Let me be clear, the population density of India is much higher than USA. But, when you compare New Jersey and India - New Jersey is actually slightly more densely populated. And New Jersey is much more densely populated than Haryana, India.
The next issue that comes up is one of regulation and availability. Yes, real-estate is regulated in India with laws that prevent easy buying and selling and land records that are poorly maintained. This simply means that the prices can be artificially inflated in the near term (that could last several years) but in the long-term must return to rational values.
Will someone please explain this to me? How can farmers that make less than $1000 per annum continue to own land that is valued (notionally) at several $100K? Are the low rental yields (2-5%) indicative of the bubble?
Update: Today, Wall Street Journal writes about a trader that made billions betting against the real-estate bubble.
I heard the same arguments repeatedly in India - house prices never go down etc. We shall see!"Most 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," Mr. Paulson says. "Mortgage experts were too caught up" in the housing boom.
In several interviews, Mr. Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn't enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, "you can't short houses."
Update (Oct, 2008): Time reports Mirroring the US, India's Real Estate Sector Melts Down - here is excerpt:
Over the past few years, increasing demand had pushed up prices, with speculators jumping in to further inflate the market. Eventually, inventory piled up when buyers refused to pay unrealistically high prices. "So many transactions were taking place between speculators and investors that no one bothered to find out what the end user, the family who would eventually live in the house, would be willing and able to pay," Shukla says.Like this article? Get it delivered to your email. ( Or by RSS.)
209 comments:
«Oldest ‹Older 201 – 209 of 209I think the reason is primarily high speculative demand. There are supply side constraints on land due to poor infrastructure and regulatory hurdles.
Anshu,
Interesting post and very interesting to see the comments that followed. I'll share a bit about my perspective as the founder of India's only website for the rental of holiday homes (homestaysDOS.com). I get asked this question a large number of times by fellow NRIs as well as my friends in the software industry- Is it worth it to buy property at the costs they are presently going at?
My view is that there is definitely a bubble. Do developers or properties merit the prices that are being charged? definitely no. But why is there a bubble? In the urban areas these are some of my thoughts:
1. Lack of quality completed supply. In some cities like Mumbai large contiguous plots are a rarity and so it is difficult to acquire a large plot on which a nice building can be built with various amenities. In other cities, litigation and permissions are tough to come by.
2. There is a significant cost of corruption and paperwork. Given that this pyramid scheme has blown out of proportion, getting permissions have meant greasing palms which ends up in huge costs that boil down to a meaningful surcharge per square foot which the retail customer has to bear.
3. Longer construction time and higher interest rates. Interest rates are higher in India as compared to the west and all developers are leveraged. Most to unorganized sources. As construction stretches for years, the interest burden keeps increasing leading to them having to keep increasing prices in order to service debt.
4. Lack of a redevelopment strategy. Redeveloping a building or demolishing an old society and rebuilding a nice one in it's place takes inordinately long in India and is a tedious process. As such, it is very difficult to free up supply in better locations pushing up prices in the few projects in those areas. These prices then have a domino effect as radius goes away from these areas.
Coming to the touristy destinations (you've mentioned Dehradun), I would look very carefully at places before buying and trade off plot size with the quality of life associated with being in a more vibrant place (more details on our owner community). Some strategies I have found to work well:-
1. Negotiate for the smallest plot size you can be content with.
2. Watch the calendar and weather. Schedule your negotiations when the time of the year has worst weather and preferably the same weather for another 2 months (summer for e.g.)
3. Buy in areas where zoning does not permit higher value end use - e.g. hotels, resorts, schools etc.
Hope this information is useful to your readers !!
well, when u go to buy property, it is always expensive.. but what you should keep in mind is that you are buying it for ages to come and not for a small time period. moreover if u plan to live there then u are not going to be checking its worth everyday so bubble or no bubble.. u will live in it..
My Observation
1. Indians are big savers.
2. Real estate makes the largiest pie of investment for indians.
3. Own home is a must have for Indians. This is counter-argument about real estate being unaffordable for people -- In India if a person cannot buy a house for him at age 25 (even after taking 85% home loan) then he will save every penny and will try to buy at age 30. If he cannot buy at age 30, then he will keep saving and buy at age 35. Indians are not used to concept of staying on rent for whole life.
So it is most probably about thinking of Indians on which builders and agents are making their bets. Until it changes, this bubble keep becoming even larger.
Aah what a response Anonymous. None of your points make any sense:
1. 99 Acres may be unreliable but can u show me the source of reliable information. The prices are fixed in India by word of mouth. You know that's bad when you don't know what the real estate prices in your neighborhood are.
2. USA has the social security system in place. Don't even go about mentality. We had a mentality in India to save but now a days, its all EMI (Easy Monthly Installment).
3. Keep the comparison of apples to apples. There are rich people in USA also. Those guys rake in millions of dollars just like Indian rich. We are comparing average.
Real estate rules in India could also be a problem. Indian banks give out loan worth 85% of the house value. So if you are buying a 1 crore house, you put 15L down and 85L loan. If the house price goes down 20%, you have to give the bank the 12.75L to keep their liabilities to 85%.
I like your article and it really gives an outstanding idea that is very helpful for all the people on web.
When it comes to real estate, we are bothering about many things- Numbers, prices, locations, luxury, swimming pools, clubs. But what about- Earthquake Resistance of the Project. India has 60% of the land under earthquake prone zones and NCR is at High Earthquake risk that may be induced by Himalayan quake. Then is our Builders adapting Advanced Earthquake engineering technologies as like Japan or California?
The answer is fizzy. Some builders are adapting good standards than others and some not and some worse. As like luxurious amenities we can't judge the earthquake resistant standards of the construction, its even impossible for normal civil engineers to conduct Complex seismic analysis for a Big Residential project.
The Real answer is Arch Rating. Visit it at www.archrating.com, the service we just launched. Arch rating was numerical rating given to residential projects for their earthquake resistance. Simple. Higher ratings indicate High earthquake resistance. Hope, it would drive the Indian real estate towards better implementation of Earth engineering technologies.
What's your views on it? Did you believe it would drive Indian real estate towards better Earthquake resistance standards?
I'm reminded of the IT bubble. A time of irrational exuberance. We cannot rationalize the property price bubble in India. Just wait till the land mafia has to pay back their loans, there will be mass liquidation of their inventory.
In India foreign investment plays a major role due to which demand has been increased and the prices have risen up at much higher level.
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