Thursday, November 13, 2008

Builders go with a begging bowl to the PM has a good article on the sorry state of builder finances
In India real estate gets unreal

By Dr arvind, Section Real Estate
Posted on Wed Nov 12, 2008 at 11:31:03 PM EST
someone please help me here. How is it that the country's top realtors who could not have, in their wildest dreams, hoped for formal audiences with the country's economic decision-makers even a few years ago are walking in and out demanding, among other things, lower interest rates, ostensibly to protect the interests of 250,000 construction workers?

Let me break this argument up piece by piece, or should I say separate the carpet area from the built up area. Let's begin with an example. Assume I bought property in Mumbai (pre-2004) paying around Rs 30 lakh (Rs 3 million). Today, the same property quotes for anything between Rs 90 lakh (Rs 9 million) and Rs 1 crore (Rs 10 million).

How did this happen? Well, it began in the glorious days of interest rates, with the figure at an all-time low of around 7 per cent. Today one can definitively say it was this very low interest rate regime - I don't care what the supply side guys say now - that triggered, massaged and abetted the mad spiral that resulted in the 300 per cent hike in property prices in the city of Mumbai.

And obviously if it applies to Mumbai, it must apply in similar or identical proportions to property and land across the country, including for industrial land and special economic zones. The same low interest rate regime triggered a housing bust in the United States and a global financial cataclysm, but that's another story.

It also meant that the well-to-do here were buying second, third homes, and trying to flip them around. At 7 to 8 per cent interest rates and rising incomes, the opportunities were almost magical. Browse any major realtor's website (including DLF) and you will see grand, upscale projects which are great for those who can afford them, but hardly deserve the finance minister's intervention if they have to be sold at half the present asking price.

There is an important reality, pun not intended, to reckon with. It is that the stock market party is taking a long breather. Obviously it would be good for all, including this writer's financial assets, if the party resumed. But it looks unlikely to for a while. And promoters would be wise to accept that the markets are not discriminating against any specific industry or company, at least at this point. A look at DLF's stock price versus the Nifty since January 2008 is illustrative. Both have moved almost in tandem.

As have the stock prices of a host of other companies in diverse sectors. So why then is the fate of the real estate industry more perilous than anyone else's, is the question I would like to pose. Surely not for building more diesel genset-powered malls or lakeside apartments and chalets. As I see it, every business house in the country is struggling to match capacity to demand, which is falling. Tata Motors [Get Quote] has shut plants to manage inventory, so have a host of other auto companies. And they, quite naturally, want auto loans to be made cheaper.

Click on "Full Story" for more...

And for all the prime minister's pleas, every industry I know of is rationalising its workforce. Thanks to Naresh Goyal and Jet Airways [Get Quote], no one will, let me assure you, put 400 youngsters out on the streets overnight. But they will cut back and they have little choice but to do so, particularly in industries where out-of-control factors like sky-high oil prices have wreaked terminal damage.

One newspaper report quotes a prominent developer (apparently trying to convince the UPA government to ease up things for homeowners) saying, "The impact of the depressed market will not only be felt on our share values, but also on jobs and overall economic growth." What he mostly means is that the depressed market has severely hampered his ability to raise funds in the last nine months or so. Too bad but he is not alone.

If I were to go by one report, DLF's K P Singh is asking for interest rates in the range of 8-9 per cent. Which is about 1 per cent higher than when the mess began piling up. Brilliant. And would that assume that real estate prices remain where they are or ideally head up another 300 per cent? The industry also wants easing of bank lending norms. Nothing could be more disastrous at this point, I would hazard. So should the real estate industry (it insists it wants to be called one) be abandoned? Not at all, treat them well by all means, but do not by any stretch create special dispensations. For the simple reason that their expansionist ambitions were linked to capital markets and the absence of the latter does not mean monetary or fiscal measures are called for.

Now what is our Joe the Plumber saying? I have an idea. Which is that it has nothing to do with how much supply there is in the system, at least in real estate. It is to do with prices. And till they come down sharply, there is no hope of demand picking up again.

Think at least a 100 to 200 per cent reduction. Sure we could do with lower interest rates but I am of the opinion that higher interest rates (not 17 per cent!) are not a bad deal for this economy.

I have a thought that I would love to open up for debate which is that the excesses of low interest rate regimes outweigh the pain caused by high interest rate ones. That's another story as well.

For now, it's best to leave the real estate sector alone and focus government time and money on real low-cost, rental housing. Like China is.


Anonymous said...

The finance minister is hell bent on pushing his head more vigorously into the sand in the face of glooming economy.

FM assures more loans for real estate - "government accepted that real estate is an engine of growth. At a time when the economy is facing a threat of slowdown, the sector could be used to revive it".

What is he trying to convince the common people about? All the sectors across the board are bleeding due to lack of demand for services and products …the manufacturing units are being shut across the country …so I will revive the REAL ESTATE engine and it will pull all of you out of the mess that has been created…

Anonymous said...

In the present scenario, the government is likely to cooperate with the builders to stop a downward slide of prices. Politicians have invested very heavily in these companies and they wouldn't let their investments go burst. Having said this, the ultimate outcome depends on buyers and if they do not succumb to the propaganda of builders/govt/ real estate agents, the real estate assets will crash.

The talk of building affordable housing is nothing but propaganda.

Anonymous said...

True politicians have sunk in a lot of money and they would like to make profits. The last part of this drama could be a bailout by the govt. Basically, robbing the Indian tax payer and putting it in the pocket of the Builders/Politicians. Nothing new...this will not revive the building industry though. Nothing will, the only way to revive this industry is by lowering the prices till its a fair price. That's the only time a buyer will buy...the fools have been suckered the people patiently waiting now are the intelligent ones and lowering of Interest rates also will not help. Like Observer pointed out interest rates will rise and fall in the end the price at which you procure the asset is what really counts...

Anonymous said...

Govt. should understand people are very much willing to pay high interest rate,
provided the price is less. The election time is near & disappointing a large middle class buyer by keeping the prices up, chances of winning are less.
OR the disgruntled citizen may demand reservation or rationing in housing.[Yes builder has confirmed about huge demand.]

It will not take much time to covert affordable housing proposal into nationalizing the real estate companies, which will attract huge vote bank, because free color TV is no more attractive.

Builder can beg to politician but people can change the constitution.

This is the current state of global economy; obviously Indian real estate association can’t change the global dynamics.

So guys pick up after fall, half price guaranteed in next year.


Anonymous said...

Government doesn't care about middle class or their votes. The middle class people are less than 1% of total vote bank and majority of them don't vote.Most people who govern us are corrupt and they don't care what happens to me or you. The whole real estate platform is supported by politicians/gangsters and as shivaji maharaj mentioned, they will hold on to their investments as long as possible and worst comes worse, builders will declare bankruptcy and politicians will find some other way to scam us.

The worst affected people in this game are investors. Just like speculators lost everything in stock market, they probably will loose their hard earned money

shailesh said...

Government is in pickle. If they support lower prices, they will face large NPA's on Bank. There will be large scale foreclosures. Any buyer who bought within last 4 years, would think twice paying EMI for house that is not worth the remaining loan amount.

Having said that Government/FM/Politicians/Builder etc... can talk all they want, but they are puny compared to Market. Even US government with its significantly large Tax base could not save housing market. All King Henry Paulson's talk have turned empty. In that comparison, Indian Government was bankrupt to begin with. The Fiscal deficit was running more than 10% even during good years. With much lower growth prospects looming next year, upcoming election year, high inflation etc... I don't think RE can be saved by Government. They can talk all they want, but Market will take care of them.

So, I would not worry about empty Govt statements. Housing in Mumbai is set for 50% to 60% fall. Prices will be back to 2005 level. It has happened before (study 1995 to 2000 period), and it will happen again. Have Patience.

Atul said...

An absolute cartel amongst: Politians (INCLUDING CHIDAMBARAM), Mafias and Builers.

When every industry is bleeding, why FM wants to declare Real Estate as engine of growth? In reality, Real Estate is not engine of growth, it is a sign of growth in all other sector.

Let us accept honestly. This government is absolutely pro themselves. They will go to any extent to save their personal investments in Real Estate. They will not allow Real Estate prices to go down - may anything happen. Evenif our country is declared Bankrupt, they will ensure that their investment in Real Estate is safe.

Why our FM want us to buy home by taking loan? Why does not he wants us to buy homes without taking loans?

The builders know this fact and that is the reason they are not willing to reduce the price even in such a bad market.

shailesh said...

A comprehensive programme to build low-cost housing, which is aimed at incentivising the buyers (and not just the builders) could not only revive the demand for iron, steel and cement, but also protect the livelihood of countless unskilled construction labourers. For lenders, low-cost homes are a safer mortgage because of low price volatility, as compared to premium mortgages which have contributed to the asset price bubbles.

A well thought out interest rate subsidy to banks would significantly lower the equated monthly instalments (EMI) burden on buyers and also give comfort to banks. The demand certainly exists. An affordable housing project by a private developer at the outskirts of Mumbai city received 66,000 applications for its first phase of 3,000 units, of which 40% are one-room-kitchen flats, measuring 300 sq ft and priced at Rs 3 lakh each.

This at a time when other developers in the heart of the city are fighting a slowdown in sales. The project aims to create affordable housing for low-income groups without government subsidies, while being commercially viable. In 2007, a strategy consulting firm that has been doing extensive work in the area of affordable housing in India, conducted research that highlighted enormous demand for housing among low-income groups.

Low-cost homes for growth

shailesh said...

The President will now get a pay-cheque of Rs one lakh every month, up from Rs 50,000 per month, while the vice-president’s monthly salary will now be Rs 85,000. It was Rs 40,000 earlier.

Salaries of top politicians

So let me get this. So President of India makes 1 lakh a month, 12 lakh a year. According to any decent banking loan, person should take loan upto maximum of 3 times annual salary. So even president can qualify for max loan of 36 lakh. Till now 2 BHK flats in far flung suburbs in Mumbai were asking minimum 1 crore. MPs can probably afford only a zhopdi in slum at current prices.

Simple question to ask, when President of India, cannot afford decent house, you can definitely say prices are insane.

Anonymous said...

Most of the labour used in RE will be directed to rural development projects, this will ensure voters stay close to home and the benefits are reflected in the rural communities.

Another new DLF enclave in a congested dump of a metro will see valuable voters moving away from the villages to build investment homes for the Sindhis and marwaris, this lot can't be a$$ed to get up and go to vote.

INDIA has seen a rise in RE on the back of immigrating high tech labour, this segment is being retrenched by the 1000 daily across the globe and for the few with jobs their $$$ and £££ is buying fewer sq-ft as these currencies depreciate rapidly. Not to mention the negative equity on the homes they own in their country of domicile........... this from my personal experience.

I am a Aircraft Engineer, we were planning to relocate to INDIA in 2009 from U.K. My house here is loosing £500/day, The £ has moved down from Rs87 < Rs71 in a month. The last thing that springs to mind now is buying a house anywhere.

Let us see what do they come up with in the weekend, the G20 reps are meeting.

Anonymous said...

50 times your gross salary is what bank is currently lending. With interest rates comming down I feel there will be some people buying houses. I earn 80,000 PM Gross and my wife earns almost equal amount. I feel I may take loan based on one persons income instead of going for a bigger flat I will settel for small one. That is the strategy I will be using. There is no point complaining about politician, Builder mafia. It is always the common man who gets affected the most and I am sure this time wont be different.

I will definetly not buy a big house but a small house with 50 lakhs as my budget.

Anonymous said...

Rent has always hedge inflation which means rent will creep up if not this year at least next year or year after that. Similarly salaries will also increase year on year on an average. Today if I take 40 lakhs loan with say around 40k per month EMI. today this amounts to 50% of my gross. Say with 12% salary increase YOY basis 40K will be 28% of my gross amount by the end of 5th year. Pus I will own this asset whereas the rent paying to landlord is going down the drain.

This is what prompting me to take this decesion.

Anonymous said...

@ anonymous

You are free to select a model that suits best to your needs. However, I have couple of questions to you.

1. Why would you buy buy a flat for 50 lakhs now, when you know that it is going to be valued at 25 lakhs in a year or so.

2. From your tone, I get a feeling that you sound like 'Abdulla', the real estate broker who frequents real estate blog. Pardon me if I am wrong

Best of luck to you

Anonymous said...


Desi Guy said...

I live in America - I invest in Real Estate; I am fully convinced that what India has is not a bubble - It is a SUPER bubble. Even in the worst bubble in worst affected states in USA is a froth compared to 400% appreciation we have seen in India for the past four years .

This is not a market driven phenomenon. This is FII plus speculators + suckers driven mania.

Now FIIs are gone - possibly for a very long time - Speculators have vanished and the prices are nose diving to reach a level.

Again - The price corrections in India as I see in this blog like builders offering 40% discount is far deeper than the corrections in US. In US the average decline is around 20% from the peak. This happened over the past 2 years!!!

So the bubble has grown far bigger than I have seen in US and deflation is also far higher than what I see in US.

Whether the price will come down to 2005 level or worse or it will reach there in one year or two years - in my humble opinion - all is guess work. What is sure to happen is that potential for appreciation is gone for a long time to come. If history is a guide ( and that is not a good comparison now because of other economic troubles) The real estate will slide for at least 5 to 10 years before it reaches bottom.

This phenomenon is much much larger even for most powerful governments. So there is little the govt of India can do except to do lip service.

Anonymous said...

This is not a super bubble but a super-super maha bubble. Not only in RE but across all sectors including commodities.

In short, the party is over. People should get back to reality.
What would happen:
--RE residential to fall by 50-60% in the coming year(s).
--RE commercial will follow to a plunge.
--Major layoffs in across all sectors especially finance and IT and all the RE related jobs like bankers, loan officers etc...
--Salary reductions will start fast. Someone here said 12% raise YOY, wtf is he talking. There could be upto 50% reductions for a lot of top paid idiots.
--More divorces as people didn't anticipate losing jobs of spouses and many people who are engaged may not be able to marry in case they lose job.
--People will take time like 6-8 months to get our of denial mode. A lot of people will still think that good days are coming back again but they are not for another decade or so.
--Please add to this list.

Anonymous said...

The current housing market is like a toxic bomb who ever will posses it, he will bust financially. So builder want to pass this toxic to buyer. As buyer are not ready to accept it they coming up with various scheme, free car, free registration etc. When this didn’t work out they asked for interest rate cut, extending loan to builder etc.
Who created this bomb ? builder, land owner, bank(easy finance), raw material(cement, steel), broker, buyer. Doesn’t matter, the rule is very simple who ever will hold it will bust. If you will pass on the toxic bomb, you will make profit.

Now you understand the game, so don’t hold it till it bust let the current holder bust.
If those housing apartment is so valuable & such a great asset, why the share prices went down by 60 -70% ? The share price of a company reflects the current asset & future growth in company’s asset. The housing & commercial projects form the asset side in the real estate firm. If the price of apartment has not dropped down, why the share price went down & real estate companies asset soared by 70% (we need a CBI inquiry for bear cartel, as if CBI don’t have better work to do).

So guys pick up after bust, half price is guaranteed next year.


Anonymous said...

RBI boost to real estate, exports

Is this good economics. I can understand 'export sector', but why real estate. Is the government facilitating inward flow of funds deposited by politicians in foreign banks as because of the recession in Europe, the funds deposited there are declining in their value ? . In this situation which foreign institutions are willing to lend money to Indian businessmen involved with realty.

I am puzzled. Do anyone of you have some answers.

Anonymous said...

I think this RBI measure was somewhat predicted by either Observer or Shailesh in the previous post..
The govt. cannot help the real estate folks by reducing the rates or providing liquidity/bailout money. So the middle path is to look like they are doing something, while doing one in this day and age would lend money to the real estate industry at the peak of the bubble. So basically, RBI has done nothing for RE. No politicians would want to pump in their money from swiss banks/mauritius banks into the real estate market at the peak of prices. If they do, they deserve what will happen to them soon :) I hope, rather pray, such politicians put their ill-gained money into the might prop the bubble for maybe 6 months more, but will result in evil money being drained from these leechers...

Anonymous said...

Indian economy too is in recession, though government may twist and turn the actual reality. The first vibrations of a impending catastrophe is normally recognized by the banking sector who while safeguarding their interests, allow others to fail. The prime causality will be the real estate sector. The worst hit will be on the investors.

No credit cards for staff of airline, finance & realty cos

Anonymous said...

Govt. does not care about middle class peoples and it is really bad,Here you have shared great points in this topic.doral real estate