Tuesday, October 28, 2008

Mumbai's super bubble

Here is an advt for an apt in Mumbai which sent my head spinning. At 55000 Rs a sq/ft it is the highest I've seen advertised. A 4 crore price tag will buy you 875 sq/ft of super builtup area. The seller is kind enough to remind you that newer apts in the locality come in larger sizes at 1500 sq/ft which would make it unaffordable to a normal resident. Also maintainence is higher in other apts, so the buyer better worry about paying Rs 10k extra a month. Once the buyer buys this 4crore apt, he has the option to commute using the conveniece of the local train and rub shoulder, noses and oily hair with thousands of other local residents by paying 10 Rs for a ticket. This is the peak of a massive bubble in Mumbai which is destined to collapse under its own weight.
NR39500000 Racecourse View From All Rooms-2BHK. (Mahalaxmi)
Centrally located 2 BHK, 875 sq feet(a size which is not available nowadays in 2bhk,since most new constructions are over 1500 sq feet and above charging about 55000 per sq feet in the same area, making the flat not affordable for many buyers), one bedroom with attached bathroom, and one with a bathroom outside,large living room with dining area,ready with high quality flooring as well as well painted walls and with 24 hours water supply,electricity backup,children's garden,and a garden to walk in as well,with 1 parking space which will be sold separately. The flat is located on the 9th floor in the B wing,Flat no 902, Is Vastu Compliant and has sea view from all rooms and also a full race course view,It is located in such a way that no construction will ever be coming up in front of it to obstruct the view. The flat is a 2 min walk from Mahalaxmi Station,15 min drive to Vt station via J.J Flyover,15 mins to churchgate by train,10 min drive to phoenix mills,10 min drive to worli seaface which will be helpful to travel to the suburbs in the next year via the sea link.Besides all of this the property is in an area which is suitable to any sort of occupants even the ones who travel to thane and lonavala and pune since it is a 2 min drive to dadar from where the western express highway begins. Also it is 5 mins away from the newly built five star Four Seasons, and also 10 mins away from ITC GRAND MARATHA Sheraton at dadar. Basically its an all gain flat which has to be sold due to the occupants moving to another country and there are no other properties up for sale in the same building or in the neighbouring buildings except for in Planet Godrej which has high maintainance as well as larger flats which are sold at prices which dont lie in anyones budget.

26 comments:

Anonymous said...

I think the IT companies are no different from Real Estate builders when it comes to giving the real picture in the face of looming dwindling business. If you ask anybody from pre-sales, sales team of IT company they will tell about how their ‘TARGETS” are in negatives and no new business is coming in. In fact some of the companies are struggling to retain the existing clients. And now there have started putting the spin on ‘Lay-off’. “Involuntary attrition”
http://economictimes.indiatimes.com/Infotech/
ITeS/Retrenchment_fears_spook_IT_employees/
articleshow/msid-3649450,curpg-2.cms

“We haven’t fired this guy, just now onwards it is the variables of monthly salary that will get affected. It is no secret that the variable component in IT companies varies from 40-60 % ( 60% ? Yeh..it is not a typo). “

Only GOD knows how these people will pay the sky-rocketed EMIs?

Anonymous said...

Realtors double broker commission
Joydeep Ghosh & Vishal Chhabria / Mumbai October 29, 2008, 0:18 IST

http://www.business-standard.com/india/
storypage.php?autono=338627

Tony Fernandez (name changed), a property broker in Borivali in suburban Mumbai, recounts this story with some sadness. Two years ago, when he was selling a flat to a retired person, there was a delay in payment because of some paperwork.

As a result, the buyer had to pay some interest amount to the builder. While making the final payment, including the interest component, there was a shortfall of Rs 5,000. When the buyer requested for a month’s time to pay that amount, the builder called him a liar.

“Today, the same builder calls up Fernandez every day to enquire if there are buyers for his new building. “Even a year ago, builders would not bother to call us up and would give us some paltry sum as brokerage. Today, they are willing to offer up to 2 per cent and another 0.5 per cent, if we can sell more than two flats,” says Fernandez.

But sales have been hard to come by. Earlier, Fernandez would sell two flats a month on an average, but in the last three months, he has not sold even a single flat. “Buyers come, see the flat and sometimes even haggle over the price. But later, they do not call back,” adds Fernandez.

The situation is same in Thane. “Earlier, builders would refuse to pay us any brokerage for selling their flats. Our commissions mainly came from buyers. Now, even big builders are offering us 1.5-2 per cent,” says a Thane-based broker.
...
...

Sandy said...

I think it is not right to come up with the bubble by stating a few examples where the rate is very high. The reality is there is a huge pent-up demand for apartments which cost from 20L to 40L in Bangalore, Pune atleast. I am sure if prices correct by around 30 percent in most of the cities, there is going to be a huge rush for apartments everywhere(maybe except Mumbai). Unlike in US where everybody has a house already, in India many people do not have their own houses, and would love to have one.

Anonymous said...

The key word is affordability. 20-40L or even 50-70L is dependent on location and buying capacity. If some one is going to take a loan for 4crs and pay 12% interest per year then, that person is real stupid and deserves to lose his money. Even to a black money buyer this is too high of a price. Just because few apts got sold, it doesn't mean that the price is justified

Sanjay said...

Below is the list of houses in Central Park Area of NYC

http://www.zillow.com/homes/map/NYC_rb/#/homes/for_sale/NYC_rb/40.800716,-73.949279,40.764503,-73.981681_rect/12_zm/

Observer said...

Layoffs may hit many sectors of the Indian economy. In particular, high paying jobs may be vulnerable, or even if the jobs are not lost, the salaries may be reduced through cuts in variable pay.

I really feel sorry for all those people who went into debt for 20 years taking out huge loans assuming their pay would keep appreciating every year. Real estate companies made massive profits over the last 2-3 years on these people. I think if people are looking to buy resale properties, they must inquire if it is a repossessed home by the bank. If yes, they must negotiate very hard with the bank to bring down the price, since there is no point in making banks rich.

Here is article about the impending layoffs. Best of luck to everyone:

http://economictimes.indiatimes.com/News_by_Industry/Cos_may_cut_jobs_by_25_pc_soon/articleshow/3651352.cms

NEW DELHI: Firms are likely to lay off a quarter of their employees in the next 10 days, as part of steps to contain costs in the face of shrinkin
g margins amidst the economic turmoil, an industry body said on Wednesday.

Trade body Associated Chambers of Commerce and Industry of India (ASSOCHAM) said the job cuts would be across the steel, cement, construction, real estate, aviation, IT-enabled services and financial services sectors.

Expansion has slowed in Asia's third-largest economy in the last two quarters, from the 8 per cent or more annual growth in the past four years, with high interest rates crimping demand and on the global financial crisis.
'
The central bank last week cut its forecast for growth in 2008/09 to 7.5-8 per cent from its earlier view of 8 percent. This compares with the economy's 9 per cent growth in 2007/08. "

"Employers have no other alternatives as part of their corporate strategy for sustaining their operations with squeezed margins (even) after after drastic cost cutting measures," ASSOCHAM said in a statement.

Last week, realty firm Parsvnath Ltd said it would axe "non-performing" employees, as it was facing slowing sales. Top private carrier Jet Airways had sacked 1,900 employees mid-October, citing declining demand and high fuel costs, but reinstated them days later on protests and political pressure.

Anand said...

Vik

I am a loyal follower of your blog. I have been trying to figure out what the real price of real estate in India is and I get really frustrated by the lack of transparency in the system.

In the US, one can quickly find out the current, past prices of any location and make your judgments accordingly. In India, it is impossible to do that.

I am a geek and I wrote a website to try to achieve this. It is non commercial in nature. All I want to do is to crowd-source this information and see if we can generate trends from the data.

The site is running at http://www.saneprice.com. Please check it out.

For now, I seed the data from various realty sites, based on the sellers listed price.

Ideally I need this information from users [they can be anonymous and don't have to give specific details].

If you think this is a sensible idea, can you please give a shout out to the site so people will know about it and try it out?

Thanks for the good work. You are a voice of sanity amidst the insanity out there.

Vik said...

Anand,
Great idea and concept. I will touch base with you to get more information so I can write a small piece of your site. This could be the Zillow for India, given the tough environemnt for discovering the price. Keep up the good work.

Anand said...

Thanks Vik

I wrote this over 3 weekends in 2007. I found no traction with the site in 2007. I shut it down since it was burning a hole in my pocket and that I moved on to another startup [a real one :)].

However, your blog got me to figure out how much the land I bought in Bangalore in 2004 is now worth.

The layout has an email list. I ended up emailing about 2 dozen people who sold / tried to sell land in the past 6 months and guess what, prices were 40% apart and there are NO buyers right now.

Buyers have a right for this information and my hope is they would be willing to provide it as well.

It motivated me to put the site back up and write to you.

You can reach me through lists@anands.net - catch you through email.

Anonymous said...

Before quoting for true price discovery, it will require a definition & assumptions. If you just want to do a survey what people are ready to pay ? the survey will still not make much sense as based on circumstances buyer or seller will negotiate hard, also the location, quality of construction factors are not measurable.
In any market based on the bull’s run Or bear run the prices will distort from true value.
For an example, a = true value , b = distortion
Price = a + b [bull’s run]
Price = a –b [bear’s run]
Economic ups & down will try to correct this distortion & bring back the price in equilibrium with value but it’s a dynamic equilibrium.

What all require is strategy, in current market strategy is bear i.e. let it fall as much as then buy.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a758oOpYTQrE&refer=home

When prices were inflated does any body gave you discount? ohhh.. this is the true price, you should not pay more.
In the same way in down turn you should ask for much less that it’s value.

Anand said...

All valid points.

However, in an ideal world, this data comes from a reliable resource such as the Government which registers the transaction and the values registered reflect the correct price of land.

Neither of this is easily obtainable in India.

What you say is absolutely correct. However, there isn't even a ballpark figure to start with.

In my example, I see price variance of 40% for the same layout in the last 3 months.

The price you pay seems to be determined by the brokers you use, which is wrong.

The Zillows of the world can factor in all the unknowns and knows [construction quality etc], factor in the owner's comments and use them to determine pricing.

In the absence of any such information, this site could be a start to identify such information. It is no way the end, but a very humble beginning.

Abdulla said...

@anand

Your exercise is futile as you will never be collate realistic figures. Unlike in western countries, about 50% of the cash paid towards the apartment is black. Only 10% of the apartments bought in Mumbai during the last one year are through bank loans. Rest 90% have paid outright cash. High end apartments costing crores may see a price correction but those between 40lakhs-1 crore are unlikely to see a reduction in price.

Anand said...

@Abdulla

That is precisely my point. There is no way to find out the real price.

If you take a look at the site, you will know that the data is gathered anonymously. You don't have to leave even your email address to register with the system.

You don't have to give your specific address, you don't have to mention anything that will point back to you.

The site gets as little specific information as possible about your real estate investment, but wants to gather trends of real estate in a specific area.

For the reasons you specify, no one will be willing to go on record to specify the actual price they paid, however, my hope is, for the sake of the community, they would be willing to share that information, in as generic terms as possible.

It might be a foolish errand, but I do hope this helps someone.

Kannan said...

Guys,
Don't miss this to read the below link...

http://www.wired.com/techbiz/people/magazine/16-11/mf_mobgalore?currentPage=1

Vik,
You make this article as a separate post...this is news for most the readers.

Anonymous said...

ANAND:
I think who paid what especially during the bubble should not be the concern.

You should see if your property investment makes Financial sense. The right price is 120X where X is the rent you can get from that property. Id the property is in big demand you can raise your multiple to 150X (maximum) otherwise, you'll lose money in the long run.

You want to know how much a property is worth. Forget Zollow etc as most of them are paid scams in US. If you can get a rent of Rs. 20,000 then the property should be worth 120x20,000 or 24 lacs. Maximum you should go is 150x20,000 = 30 lacs in case you are emotionally attached or really tempted to get it.

Prices are set by demand. If there is true demand of housing, prices will not go up but the RENTS will go up.

You'll see at least 5 years worth of supply in housing as soon as the prices correct by 50-60%. Just make financial sense of your investment.

Don't go by all these financial engineering instruments all these idiot MBAs have come up with in the banks or RE moguls.

Anonymous said...

mungerilals in ASSOCHAM thinks indian can get 7% growth.
wake up idiots, 3-5% growth is here for indian for next 5 yrs (if not worse)
massive layoffs in IT/realty/finance & retail

Abdulla said...

@kannan,

The link you pasted is a bullshit story. There is no truth in it , not even 1%. I know MR personally.

Anonymous said...

Abdulla,
Just a reminder to you that this is the Indian housing bubble blog. If you don't have anything positive to say that adds value to bloggers on this site, please do not waste our time. Do not try to spew your nonsense and try to change people's thinking and mind.

Vik: You are the moderator. Please delete his posts if they get out of context.

Abdulla said...

There are people in mumbai who are very wealthy, some of them beyond ones wildest imagination. These guys are not dependent on stock market, industrial growth, etc etc. These are the traditional bankers, money lenders, gold/diamond merchants etc.The educated descendants of some of these people do not want to continue the lifestyle of their forefathers. These are the guys who are buying high end apartments.If you ask such a guy the difference between 10 crores and 20 crores, his reply would be 'hardly anything'

As someone mentioned earlier in the blog that unless the government cracks down on undeclared wealth and pressurizes swiss or offshore banks to divulge the deposits by Indians, nothing is going to change. These are the guys who will rescue the builders and ultimately swallow them and their assets.

abdulla said...

@Anonymous,
you should be prepared to listen to + as well - news, analyze and decide for yourself which could be right. Truth sometimes hurts. If you believe only in what you like to hear, you are not going to succeed in life

Anonymous said...

Abdullah,
Always remeber that you don't teach your dad how to fuck.

Observer said...

Kannan, thanks for posting that link about Muthappa Rai and how real estate in Bangalore works. Any large real estate deal will draw attention. In my previous company, the MD received a call from a few elements when a land transaction of a few crore rupees was under discussion. The MD said he felt really scared. He then hired an ex-Army colonel as an "Administrator" while the deal was negotiated and the building constructed.

I feel the above scenario usually happens for commercial land, where the transaction values are much higher. For smaller land parcels, the goondas are usually not involved since the bribe to register the land is usually paid directly to the BDA.

Unfortunately, everyone in India has to pay the "goonda tax" which adds at least a couple of percent to house prices. Builders in Bangalore are willing to negotiate. But they request you keep the prices a secret. Also, if one goes as a group, even 40% discount is available. So if someone is really interested in purchasing an apartment, one should quote a price which is 50% of the stated price and negotiate hard. Ask for more freebies and also waving of stamp duty and registration costs and hookup charge for BWSSB and BSEB (water/sewerage/electricity).

Kalyana Malla said...

Hi Vik

Saw this entry on a website randomly. It seems to be written by someone called mediamanoos and is relevant to some of the comments, and in general to this blog

The blog from where i took it is http://mediagazing.blogspot.com/2008/07/black-swan-redux.html

i am cut-pasting the same....mediamanoos - apologies for the same, there is no way to contact u.

"Going by the present ticket prices, approximately Rs 20,000 / sq feet for the house I am staying in, the rental yields have fallen to 0.30 – 0.35% per month instead of the 0.50% they should traditionally command. Hence the Rental-EMI ratio, that is, the ratio of the rental value that the house commands vs the EMI value payable if the house were to be purchased by the tenant, is at a ridiculous 3.

To illustrate, the rental value of a Rs 2 cr house is about Rs 60,000 (0.30%) to Rs 70,000 (0.35%). Let us average it as Rs 65,000.

Now if one were to buy the same house, assuming that one will get a mortgage for 90% of the value, and at the present 11.25% floating rate, that means an EMI of Rs 1,050/- per lac for a tenor of 20 years. Hence a total EMI of Rs 1.90 lacs.

Hence 190,000 / 65,000 = 2.92 = Approx Rental-EMI Ratio of 3

In 2004, the same ratio was at 1.5 to 1.7 – calculated at approximated rentals of 35,000 vs capital value of 80 lacs, that were prevailing in WEST BANKS circa 2004.

This shows how unaffordable houses have become in WEST BANKS (and Mumbai) a short space of 4 years.

A related indicater akin to the Rental–EMI Ratio is what I call the Quality of Living Dip. Clearly when you move fm a rental to a owned unit, it is unlikely that you will be able to afford the same or a similar unit. Clearly there will be variations (downward) in the quality of construction, building, locality and distance fm city centre. The extent of the downward variation you are willing to live with is what I called the QoL (Quality of Living) Dip.

The QoL Dip according to me is the difference in capital values of the rented unit and the owned unit, when the rental value is taken as the input EMI into the owned house.

To speak in Englesi, going by the above example of a Rs 2 cr house commanding rentals of Rs 65,000; assume that this Rs 65,000 goes towards an EMI for a house at a 20-year tenor. Presently the maximum loan that Rs 65,000 can service at an EMI of Rs 1,050 per lac (SBI rates as on today) is Rs 62 lacs. Typically since 90% of the asset value is financed the total capital value is likely to be around 69 lacs.

Thus to move fm 200 lacs to 69 lacs is a discount of 65%. This is the QoL Dip one has to undertake in today’s property market.

So what would be the QoL Dip in 2004 – approximately 30%. In my view a QoL dip of 30-40% is par for the course. Beyond 50%, a person is taking significant drops in Quality of Life just for the sake of ownership. Unless there is an accompanying change like relocation of office thereby enabling Quality of Living indicators to be kept intact, any QoL Dips beyond 50% are not advisable and will certainly affect the mental and emotional outlook of the person. Imagine moving fm Bandra to Kandivali (which is what Rs 69 lacs can afford today) overnight. And I mean no disrespect to Kandiv folks!

Whaddya think?"

Kalyan

abdulla said...

Presenting wild theories on real estate prices, reading favorable comments, rejecting anything pessimistic is not going to bring down the real estate prices. Prices may show some correction in the coming few month but do not expect a crash. This is the best time to look for bargains and who knows, you may find something matching your budget.

Anonymous said...

Regarding the Mumbai super rich, people who do not distinguish betweeen 10 crores and 20 crores, why would they purchase more flats? Most of these johnnies wealth is safely inside swiss banks and/or other legit and illegit businesses like gambling, restaurants, financing, govt contracts and so on. Why would they rescue the builder lobby? Plus this breed of people usually are very very low profile, they operate through some front companies and do not wish to be in the limelight. And finally if nobody is going to stay in the houses that are being built, why would a person want to buy it? You may be super rich, you may feel 10 crore is pocket change, but WHY would you buy it? Why? ONLY if you wish to buy to stay there OR to invest. Looking at the present situation where these worthies must have lost at least SOME money in the BSE, I do not think they will jump in now into the real estate industry at this juncture.

Vik said...

Kalyan,
The points are relevant. Again if we follow the Japanese bubble prices took a long time to come down and the loans were passed down a generation. In India too, we all know how the Zamindars exploited the poor farmers. In modern India, the builders are the new Zamindars and the middle class is the cattle. People like Abdullah are shepherds whose only aim is to make sure the cattle don't develop a mind of their own and they keep repeating the mantra that real estate doesn't go down ad infinitum.
Time will tell who is right. As of now there is a slowdown, there are no buyers, Loans are scarce and people have taken a beating in the stock market. If you think people have learnt anything is that speculation is bad for your wallet. There is definite value in buying property however it is for your own consumption and within your means, whatever that might be, from a quality builder, with a clear title at a good rational price. If any of these parameters are compromised, your sleep is compromised for many many years