Monday, December 22, 2008

Get Real : Times of India editorial

The newspaper which prints "Property Times" and subtly promotes real estate bulders through carefully planted advertorials is now playing to the public sentiment. Alas we know TOI is the wolf in the lamb's clothing. As soon as prices drop 10% they will be back with articles promoting how people are lapping up properties by the dozens. Whether it is in god-forsaken places is another matter. What they care about is advertisements from builders. In a city of 20 Million like Mumbai, if 200 people buy an apt in Khandeshwar, Karjat or Panvel, far flung exhurbs in Mumbai it makes front page news. So much for the grand old lady of the Bori Bunder.

Real estate is one boom-gone-bust that's proving hard to tackle. At the government's prodding, public sector banks recently offered concessional
interest rates on new home loans up to Rs 5 lakh and between Rs 5 lakh and Rs 20 lakh. This was welcome, save that discretionary lending could still thwart loan aspirants. Also, the rates weren't retrospective, giving existing borrowers cause to grumble. As a palliative, the government appealed for lower floating interest rates. Its efforts paid off. State Bank of India, the country's largest bank, is to offer cheaper loans. Earlier, HDFC, India's largest private mortgage player, announced cuts in home loan rates for both new and existing borrowers. ICICI also hinted at reductions. So the soft rate trend is emerging in major private loan disbursing institutions as well. Reportedly, other realty-boosters under the government's consideration are an external commercial borrowing window, a service tax cut and rationalisation of stamp duty on property deals.

Realtors must accept that their big margin-driven boom-time is over for now. Much of their woes are their own doing. They overbuilt assets, riding on a bubble. With depressed demand, they continued to expect unrealistic profit margins. And now they're resisting top-end price corrections. Inflated asset prices are such that even the moneyed are sweating over purchases in tier-I and tier-II cities. Shifting gear from luxury and high-end to mid-level and affordable housing is required. Demand for low-cost housing is massively unmet; the potential for investment here goes beyond the context of today's economic downturn. India's young demographic profile, rapid urbanisation and high savings rate can keep propping up the property market. But housing prices in some segments need to fall by as much as 30 per cent to match affordability.

However, difficult bank financing can hobble low-cost housing projects. Banks need to ease lending, for which they may have to lower deposit rates. Further rate cuts from the RBI would help. Also, apart from builders' pricing, the issue of artificial land shortage keeping prices up needs addressing. Some of realty's demands converting short-term bank loans to long term and rate cuts on home loans of all categories have grounds. Others are mad-hatter expectations, such as wanting a government buyout of unsold assets at current market rates. Realtors have sensibly refrained from formally soliciting any such morally hazardous bailout.

The health of real estate has strong macroeconomic multiplier effects, both in terms of contribution to GDP and employment generation. The more the sector is stimulated, the faster India's economic turnaround will be. The real estate sector has to get real about the changed market environment, doing itself, consumers and the economy a favour.

17 comments:

Hemant said...

Very good article, Specailly the fact highlighted about the rtole of Times of india!! I am of the same opinion since last 2 years that TOI is the wolf in the skin of Sheep.. if you see the article in property times , Ms. Padmalakshi writes an article out of her head.. in the trime of recession she says that what buyers want is good qaulity homes so that demand can pick up !!! now this is the basic fact that buyers want qulity for sure but also need affodable homes...at these rates prevailing ( even after 10 -15 % discount) builders are earning 200 % to 300 % profit..just imagine the project which were sold on ghodbunder road @ 2200 in 2007 now same project are sold at 5000 builder has margin of 2800 !!! above the price of 2200 & mind well at that price also they were making huge profit, Builder do not construct buildin for 20-30 % prfoit !! for that they can go to any other line ,!!! so there is a very good scope of further price reduction of 40 % !!!! & builder would still make money....No one can be above market force let it be bill gates or Reliance Ind..every one has to face the Economic cycle & whic is correcting in Reality sector..so folks wait for another 4-5 quarters & see where this market heads to !!!

Anonymous said...

times of india - property times editors are crooks. Do not listen to them. The prices they display are shedy and articles are written totally based on builder lobby instructions.

Btw, I own home in Hiranandani Estate Thane and I have been notified of further 10% downfall in property prices there. Investors are now ready to sell flats for about Rs.5000 sq.ft. in Hiranandani Estate thane from previously Rs.6500 in Jan-Apr 2008.

Jay.

Anonymous said...

If you talk about Hirandani Estate, I was looking to buy a falt there in year 2004, the rates quoted were around 2000/- (resale).
In just three years how can the rates go to 6000/-? A jump by 300%!Economic growth, inflation, etc etc is in double digits only not triple digits!! I think the law of reversion to mean will apply, hence anything above 2500/- for Hiranandani would be overpriced.

Anonymous said...

hence anything above 2500/- for Hiranandani would be overpriced.
>>>
Dude, Do not dream about buying home in hiranandani estate for rs. 2500/-, it will never come back to this price. Hiranandani estate thane is the best estate in mumbai and living standard + quality of construction is very very high (just like you see in united states).

There construction cost is about Rs.1500 per sq. ft. + land price which do not include estate complex development cost.

Hiranandis have huge follower such as NRI's investors who trust hiranandani blindly because of their superb reputation hence no such investors will sell flats for price lesser then they bought about year ago. These kind of investors have not bought flats on loans and have already paid more then 90% money to builder so no great problems for hiranandani's as well.

As far as down fall in hiranandani prices is concerned they have already fallen by 20% and its very unlikely prices will go much down there because its a premium township project where everyone wants to live. There will be many takers immediately on every dip in the price. 2-3 of my friends are already in queue to buy houses in hiranandani but they are not getting loans.

Well, I am not real state broker but I can see prices stabilizing at Rs.5000 in hiranandani because there is still less availability.

If you talk about other projects in thane city then yes i can say prices will roam around 3000-4000 depends upon project to project.

Jay

Anonymous said...

I remember the same thing happening with Hiranandani Powai. Prices in 1995 were around 9000 rs/sft. Astronomical by those times standards. At that time too the construction cost was slated to be around 1200 rs/sft plus property prices made it impossible that rates would come down below 2000 rs/sft. Yet in 1996 to 1998 the prices did come down to 1500 rs/sft.

So dude, though you own a house in Hiranandani and it will appreciate over your life time..in the correction anything can happen. No one can predict. Let's wait and see.

Anonymous said...

Jay,
What looks completely unbelievable now will happen. It is like people could not dream stock market to be below 10K just a year back and it is more than 50% down from its peak.

Similarly, when the prices fall, they fall the same way as they rose and even faster. Rs. 2000 is quite probable for Hiranandani in a year or so. And NRIs don't have much money left either. A lot of IT NRIs are packing bags and would be coming back to India in the next 6 months with very little savings that they will not blow on these absurd prices. Moreover, they have been through one housing bubble in US and know the whole drill of falling prices.

Anonymous said...

Jay,
Easy money is what got us in this mess. Your friends who are not getting loans: Banks now have realized that the asset your friends want loan for will not be worth the current price in 6-8 months and your friends will walk away. They don't want to do risky loans anymore. Moreover, there is a liquidity crisis all over the world.

This is a very reason that prices would go down as easy money is over. Even if rates go down further, it would be hard to get loans on declining assets. Banks would really have stupid MBAs who would make a loan on these declining houses.

Observer said...

It looks like Vulture has the right strategy to profit from this. Maybe he is old enough to remember the 94-95 boom and subsequent 96-98 crash in real estate in India where prices came down by almost half, and in some places even more.

I had already posted in a previous comment the headline from Business Standard in 1997 about the prices correcting in Pune. Then too, the builders like Gera and others were saying that this was only a minor correction by 5-10% or so. Well, prices came down by half and stayed there until 2002 or so. History now repeats itself.

Maybe people here could join forces with Vulture and pool into a vulture investment fund to reap major gains.

Anonymous said...

Aah! Good! Somebody here at least recollects the last boom-bust cycle that ended in 96-97. The circumstances are eerily similar to today- a real estate boom and a parallel stock market boom (but today the bubbles are on a much larger scale).That time I remember everyone in the western suburbs of Bombay and his uncle had booked a flat in Mira Road. When the bubble burst one of my friends, was stuck with a flat bought at 1500/- psf and the rate suddenly went to less than 800/-psf. It reached his acquisition price of Rs.1500 psf again only after a good 8 years when this new bubble started.
At that time LOK was supposed to be like the Hirandani/DLF/Unitech of today (albeit on a smaller scale). The company had just got listed (during the parallel stock market boom of Harshad Mehta). The rest is history. Their infamous Mulund project (next to the rly line) was a drain on many people's finances, who got the possession only in the second boom after about 8-10 years, having paid all the EMIs before they got the flat! Incidentally the Hiranadani share listed on London's ALM (Alternative Investment Market) has reportedly taken quite a beating, I am told, those of you who are in touch with the financial district of London please verify this.

Prashant said...

Observer,
Can you please post the headlines from Business Standard about the previous real estate bust? If anyone else has any link, please post them. It is always good to look at a little bit of history to understand the markets. Thanks.

Observer said...

Copying this from www.indianeconomy.org. The below is a story that came out in 1997, when the last property crash in Pune was getting underway. Isn't it extremely similar to what is happening now? People should not forget that prices declined almost 40% and stayed flat for quite a while before the recent bubble began. Even some of the same builders like Gera etc are mentioned. Indian memory is quite short, what happened 10 years ago, is clearly forgotten.

http://www.business-standard.com/india/storypage.php?autono=41755

---------------------------------

Real estate bubble bursts in Pune

Avertino Miranda / BSCAL May 01,1997


Real estate prices in the city have witnessed a sharp fall in the last six months.

The prices were holding firm for quite some time due to booming industrial development and concerted efforts by a cartel of city builders.


According to V N Rao, a branch manager with Housing Development Finance Corporation (HDFC) here, the prices of flats in the city have dropped in the range of 10 per cent to 30 per cent.



Rao admitted that there had been a slowdown in the demand for funds in the city due to the depressed real estate market.



We have disbursed around Rs 100 crore in fiscal 1996-97 in Pune which is an increase of 15 per cent over the previous year, he said.



With real estate prices still ruling high in Pune, Rao said there are very few people who can afford to put their money even after seeking substantial loan amount to buy flats.



However, most big players in the real estate tried to play down the depressing market scenario. Kumar Gera, managing director of Gera Development Pvt Ltd, said the drop in prices was in the range of 5 per cent to 10 per cent. In the last 3 months, he said the fall in demand from non-resident Indians in particular has affected the real estate prices.



However, Sandeep Sethi of the Citibank (Mortgage) was of the view that the fall in prices in Pune was more of a correction as the real estate prices had shot up sharply in the last 3 to 4 years.



During this upswing period, with a large demand-supply gap, prices of flats in the city went up between 40 per cent to 150 per cent, he said.



Another factor attributed for the fall in prices is that a major part of the demand, around 50 to 60 per cent, comes from people in Mumbai and other places. Besides, several people are holding up their decision to buy flats in the wake of the slide in real estate prices.

Anonymous said...

To read about current status of Hiranandani's chennai project..please read this post and understnd the reality.... dont forget to read the comments

http://www.chennaimetroblogs.com/hiranandani-palace-gardens-is-it-worth-the-risk/

Hemant said...

Jay,

What all people posted subsequent to your post is 100 % true....in 1996-97 period in Mira road i have seen prices doubling from 700 to 1500 & one of my friend invested , with in next 1 year the price quoted for same area was 650 !!! Even Hiranandani powai is another example where rates opened at 2500 & went up to 9000 & then droppe down badly to the same level, one more example is lokhandwala where same thing happened !!! so no one on the earth can cliam that prices will not go below 5000 in iranandani estate ! & FYI it is not he best project or area in mumbai or navimumbai , thane......buddy take example of prime area like walkeshwar ^\& cuff parade where last month Philips India sold its flat for 42000 PSQ rate which is more than 1/2 of the rate at which one NRI & VInod khanna had bought their falts in same area 8 months back...You can check the same on any news site !!

There is no full proof business in the world where possibility of Losses arew NIL !!! so what all NRI investor you are talking about will sell it at par or below price when it is needed..& ya dont compare any our project with USA as do we have any basic infrastructure like US !!! no not even 10 %..but prices are higher then that of subburbs of chicago, NJ & SFO !!!! so chill & see where prices fall in next 8/10 monhts...

Atul said...

I am surprised. Really surprised.

I remember the day when I published 4 articals as comments against optimism prevailed in Real Estate during March'2008 on Rediff, I was bombarded with words like 'Pessimist', 'Coward', 'Idiot' etc etc. Finally, I needed to remove my comments. In fact, I deleted my ID from rediff now.

When I said that I lost 30% in Real Estate investment I made in 1996 and sold in 2001, everybody called me a fool. The common comment was 'REAL ESTATE PRICES CAN NEVER GO DOWN'. Now, I can see many people remembering the time here !!!!

Good to see that now, there are people who can listen to me.

Anonymous said...

90% of Hiranandani estate is stuck in forest land> No bank will give a loan for that project. Additionally a couple of the new building like Fiona etc, have the top floors illegally built as permission is not there. Hirandani is trying to get additional FSI to regularise those

Anonymous said...

It's law of supply and demand starting to unravel. For last 5 decades, home affordability existsted for 5-10% of population reducing now to barely 2%. Common man of India, which is 90% still makes 12 lacks per year or less. for example, prime minister of india makes 12 lacks per year. With banks cutting down on loan, Prices of 12 * 3 = 36 lacks is more resonable for aam admi to get a loan as well from bank. Anything above that is purely bubble as per bank...

Anonymous said...

The person who predicted the India and US Housing Bubbles way back in 2005

Saturday, Jun 18, 2005

Beware housing bubble: Mr Deepak Parekh, Chairman, HDFC

Mumbai , June 17

THERE is a need to make sure that all the stakeholders in the housing sector - development authorities, regulators, housing finance companies, banks and developers - work together to check the speculative angle in rising residential property prices, Mr Deepak Parekh, Chairman, HDFC, has said.

Writing in the company's 2004-2005 annual report, he noted that it was probably for the first time in history that so many countries across the world were simultaneously witnessing a housing boom. "In this scenario I cannot help but be reminded of what Stephen Roach, Chief Economist, Morgan Stanley, said recently, "Housing is an asset class as prone to excess as stocks, bonds, currencies and commodities. If it feels like a bubble, acts like a bubble and looks like a bubble, it probably is one."

"At the risk of sounding overcautious, I would like to draw your attention to pointers that support the idea that housing markets could be more prone to bubbles than stock markets. One of the reasons is imperfect information. No two homes are alike nor are there exchanges where prices are recorded. There are no organized futures or options markets for properties, so it is a market with no place for short selling.

"Moreover, rising property prices encourage banks and financial institutions to lend more, since collateral values increase. But when prices fall, banks pull out, amplifying the bust."

He said that today, warning signs are flashing in many global housing markets. Property market surveys have revealed that the ratio of housing prices to average disposable incomes is touching unsustainable levels.

In the US, house price inflation has been at double-digit rates since the past year. Another country feeling the pressure to curb speculation and keep the property market healthy is China.

"In India, residential property prices in some areas have recorded a growth of about 15 to 20 per cent in the last two years. This has raised concerns, and one of the questions being repeatedly highlighted is whether the escalation in demand and the resultant uptrend in prices have been driven purely by low interest rates and rising levels of affluence, or whether the success story has a speculative angle attached to it." This, Mr Parekh said, required all stakeholders in the sector to work together and introduce sufficient checks and balances to addresses the speculative angle.