Friday, January 23, 2009

Housing bubble comparisons - US vs India has an article on the reasons why the US housing bubble went bust. At the end of the article there is a paragraph which downplays the impact of the Indian housing bubble and focusses on the Indian tendencies towards home ownership among other things. What the article fails to mention is the meteoric rise in prices over short period of time, the affordability issue in cities like Mumbai, Delhi, the black money aspect of the construction business and finally the steep drop in realty construction company stock prices. This the exact soft marketing which we have discussed and now see in action.

The lending scenario in India -

A subprime crisis of this nature and magnitude is unlikely to occur in India, thanks to some very strict bank policies that are in practice.
As a general rule the borrower needs to pay a down payment that covers 15-20 per cent of the cost of the property. This by itself is a test of the borrower's credit worthiness and enables him to have a stake in the property. Also, the bank safeguards its lending interests by ensuring that the money lent is below the market value of the property making allowance for a nominal dip in property prices.

Another important factor is the initial screening banks conduct to confirm the eligibility of the loan seeker for the requested loan amount. Banks make sure that the EMI of their loan applicants does not exceed 50-55 per cent of their monthly incomes. This ensures that as long as the borrower is able to maintain his current income levels, he will have no trouble in making his monthly payments.

Moreover the Indian sentiment revolves around buying a house and spending a lifetime there. Home buyers looking to live in the house purchased rarely change homes in short time frames while in a place like America embracing change is second nature. A situation like this may be far away for India, as we are a growing economy, where mortgage levels are not comparable to developed economies.
We also have strict regulatory bodies like the Reserve Bank of India [Get Quote], which ensures that loan products that could produce systemic risk never make it to the market. Besides this aspect, a favourable market does not exist in India for similar loan products like the Option ARM. The psyche of the Indian consumer does not easily accept debt instruments and a loan is usually high priority and the focus is usually on closing it as early as possible.


Anonymous said...

real estate is doomed.
In kochi, my home town, in kadavanthara, plots were quoting 7 lakhs per cent.Now the plot nearby which a neghbour is trying to sell for 9 months now.A few buyers (RE agents) who come are asking for just 45% of the asking price. The neighbour has already reduced asking prices by a third.
HAHHAAAH....a THIRD DOWN ALREADY????...The story of many others in kochi kozhikode and Tivandrum are no different.

i WAS EXPECTING ONLY A THIRD off a good six months down the line.Looks like this crunch is more severe than most have expected.


Adi said...

50-55 percent of monthly income?? Are they kidding me? Do they think people here pay 55% of their incomein mortgage? People foreclosed when it went to 55%.

General safe rule of thumb is 30% of your income should cover your emi. 55% of monthly income itself is subprime regardless how interest rates are arranged.

Mass layoffs have not yet hit Indian market. There is bound to be some meltdown. Also speculators are highly leveraged, trying to cover up emi. It was always to find a bigger fool to make profit. Now all of a sudden fools have taken shelter and speculators are left holding the RE they don't even live in.

It will be interesting how this market plays out.

Kannan said...

One aspect that media dont understand is about subprime. Most of the indian media says that US Housing meltdown is because of subprime and also reiterates that Indian banking systam did not do anything that sort.

But If we look at the past 10 years back, housing loans were given only to giverment officers, bank staff, teachers and college professors.Reason job stability and everyone wanted to get into govt jobs for the same reason.

Banks started lending generously 5 years back to IT crowd who had disposable income.Before that all the current IT Rich people were all subprimes.An IT person can go back to that status very fast in india if he loses his job under the scenario there is no unemployment protecton, assurance on the loan in the form Fannie/Freddie like in US.

Anonymous said...

Unfair comparisons:
- Till year 2001, home lending standards were very tight in US as well. But banks ran out of creditworthy borrowers by year 2003 and relaxed lending standards thereon.
- No body wants to see credit bubble pop on their watch. The Fed was desperate to keep the bubble going. China, Japan & OPEC helped it to an extent by buying worthless mortgage paper trying to recycle their surpluses.

It takes time for debt to reach over 300% of GDP. Till then private bankers will enjoy their party. Once it pops, govt will pick up the pieces and pass on the cost to tax payers and yet to be born. First was Japen, now US and next will be India (probably by 2020). Real estate bears will be laughed at for sure. Count on it.

Anonymous said...

The Indian masses are not stupid. If the Govt. tries to bailout massive wealth for the builders, banks there would be hyperinflation and India will come to the brink of a civil war.


Anonymous said...


Watched the Dham dhoom movie yesterday... one important lesson from the movie was "Your true belief will come true"...

Lets see whose belief comes true in the real estate scenario

Anonymous said...

I guess going by the comments the land grabbed by speculators will soon become agricultural land... good for the country... Soon people will move out of bangalore... Bangalore will become old sleeping beauty... IT campuses will get converted in to marriage halls...

Any comments

sunil said...

Not all media seems to be soft on real estate.

Just figured an article here that openly talks about the problems of builders:

I guess someone who isn't a journalist doesn't care much about a few lakhs from builder lobby and writes openly.

Cool Head said...

Even at the height of the so called housing "bubble" in US, prices did not appreciate by more than 100% in a year. Here they have appreciated by a much bigger factor. So the fall (reversion to mean is an immutable law of nature) will be much more severe. People forget that there is always a time lag in economics. Like a Tsunami, it takes some time to travel. It has just reached India and now the fun will start in earnest. I only hope that it does not result in mass unemployment, civil unrest or more crime. For too long the youngsters in India have got used to easy money (even a pipsqueak out of college can earn 15,000-20,000 rupees a month by joining a call center/credit card marketing company/retail showroom/etc). All of this is blown up on various consumer items (driving the retail revoloution)Once the easy money stops, the retail revolution will run into a brick wall. Already there are n number of malls that are empty. How long can the owners sustain the fixed costs? Commercial real estate will see some real action now (on the downside)

K said...

Housing loans and the IT sector

The global scenario is rather pessimistic but we should refrain from generalising a problem

The Satyam fiasco has focused on a new threat to growth in the housing segment.

Banks and financial institutions are cautious while handling requests for home loans from IT employees. Will it affect the housing sector adversely? Let us look into this issue in its entirety.

There was a time when promoters and builders were vying with each other to rope in IT companies and their employees by offering heavy discounts on apartment houses and villas.

Not only new entrants but also established and leading builders offered 15 to20 per cent discount for their new blocks if the employer companies came forward to either guarantee or at least recover EMI from the salaries of their employees.

A study conducted had revealed that in cities such as Bangalore and Pune, almost 25-30 per cent of the high-end apartments are set apart for the IT employees.

Now, a ‘cautious’ approach appears to have set in as far as dealing with the IT sector is concerned.

This trend may also usher in an age of preferring applicants from small and medium industries and Govt./PSU employees as major target groups.

Changing target groups

In the early years of housing development in the country, it was the Government which came forward with housing plans for the masses. It also allowed incentives to the rural and marginalised in order to boost housing.

Subsidies and differential rates of interest were provided in the Central and State budgets.

From the 1990s, tax incentives were also offered to promote large-scale building and purchase of houses.

The private builders and promoters saw it as an opportunity to go in for mega house construction programmes.

When the IT industry recruited a large number of ‘techies’ at substantially higher salaries, luxurious living became the order of the day, starting with posh houses to live in, modern motor cars for easy mobility and comfortable travel, as also luxury hotels and restaurants etc.

When private sector builders and developers came forward with massive construction programmes in major cities, their main target group was the software industry employees who bought the villas and luxury apartments at substantially high prices, mainly because they could afford them and wanted to utilise the tax exemptions.

Helping hand

The IT companies were only too willing to help their employees who went in for housing and real estate investments.

Builders and developers offered attractive terms to attract the IT sector.

The builders and bankers who financed the ventures were only too happy as the repayments were prompt and bad debts were practically nil.

Change of mind?

The change in approach by the bankers and financial institutions is attributable to the feared bleak prospects of the IT sector in the wake of the global meltdown and the likely shift in the policies of the new U.S. administration on outsourcing.

Some newspaper reports that mention of slashing credit limits for the affected companies does underline the need for guarded play from the financial institutions.

In the wake of heavy downsizing and salary cuts, the need for reassessing the credit limits of the affected employees needs to be looked into for the following points:

• Loan amounts outstanding

• Period of the loans

• Possibility of rephrasing the outstandings

• Present value of the property

• Possible re-employment rehabilitation of the affected employees

• Other assets of the loanees

Positive stances

Global meltdown and recession are unlikely to impact Indian software industry in entirety, although some temporary setbacks are not ruled out. These difficulties may be off-set largely by the ‘stimuli’ packages the Government and the Reserve Bank are bringing forth.

Further, the U.S. Govt. cannot afford to ban Indian software firms outright.

It is for the individual companies to select the areas for outsourcing from the angle of efficiency, timely service, comparative cost etc.

Bharat said...


This is a nice video. As per Hyman Minsky (nobel prize winner on Economics). We are in the last stages of the bull market. Anyone buying anything now is providing an exit to chumps who are looking for last minute idiots. So don't be a chump!

Be smart! Buy Silver or Oil or sit on Cash and CD's wait for the market to collapse to at least 80% from the top.

Anonymous said...

Tata Realty returns Rs800 to parent

While seeking approval from shareholders for the refund, the firm had said, “In view of the significant downturn in the real estate markets, the company has now decided to shelve/reduce the size of some of its proposed projects, resulting in reduced fund requirements.” Tata Realty had embarked on major projects, including information technology parks and so-called special economic zones.
Tata Realty’s move comes in the wake of contracting demand for housing and commercial realty in the country after interest rates climbed in mid-2008, driven by a surge in inflation that has now begun to ease. In an 8 January report on the real estate sector, analysts Siddharth Bothra and Satyam Agarwal of Motilal Oswal Financial Services Ltd said an expected shift in the balance of power from real estate developers to home-buyers was becoming apparent.
“In September 2008, it appeared that price cuts by developers along with (a) drop in mortgage rates could revive the sagging demand. However, experts and developers now feel that property demand is unlikely to get stimulated in the medium term even if real estate prices correct 20-25%; and mortgage rates decline 250-300bp (basis points).”

Anonymous said...

Rs 800 cr

Anonymous said...

RBI setting interest rates like a dog chases its own tail. This can be described using the following algorithm:

1) Economy enters recession.
2) RBI cuts interest rates & CRR aggressively. Massive govt stimulation spending as if govt does not spend money in boom time.
3) Specilative borrowing (for RE, stocks & commodities) picks up and bids up assets.
4) Economy responds to this and we have boom.
5) Boom causes inflation as the growth was less compared to injection of money.
6) RBI raises interest rates & CRR to ease inflation.
7) Go to step 1.

Anonymous said...

sign of times ahead for tech/bpo/it crowd who went amuck & strutted around like many other indians (indian govt too, exemplified by rather uncomely ex finance minister)
welcome to capitalism, injuns. I will not be surprised if foreign co get a stronghold in india and if it is back to coca cola days of indira gandhi.
To that i say : "jay ho"

Satyam staff get offers but with 50% pay cut

Anonymous said...

Media is trying to convince peoples that, India do not have subprime so
don’t expect crash , Indian housing sector is not like US so buy it. The root
cause of the issue is housing bubble not subprime. Subprime was the next
step of bubble. India does have visible inflated bubble.

“China, India stimulus will not halt property slide”

Few days ago only we commented the same thing, now
peoples are accepting the fact.

Lot of reader raised question, why a 50% drop in prices,
which model is used. The last word on model is that today
all econometric & financial simulation models has failed. Lot
of companies has stopped relying on model & algorithmic trading
is only incurring losses. So no question about
incorrect input data though it do consider data error.

Our guaranty is pretty much inline with predictions by others.
--“Many investors believe land prices will drop by a half, and shares of the country's biggest developers DLF, Unitech and Indiabulls Real Estate have tumbled by 75-90 percent in the last year”
-- Yogesh Chabria is also suggesting 50% drop in price.

So guys let it fall then only pick up, minimum 50% price cut is guaranty.


Anonymous said...

Vulture, now I am even more convinced with what you are saying.

I also went and read Yogesh Chabria's articles on real estate and read his book too Invest the Happionaire way. The book must have been written over a year ago - and there he openly says that real estate in India will fall upto 70%.

He has based his logic on the model of EMI vs. Rent and says it is much cheaper to live on rent than EMI. Only after a 50% fall, more people will start buying homes. What he and people like Parekh of HDFC said are finally coming true.

I wouldn't be surprised though that in the real estate crash, Yogesh Chabria buys real estate. I guess that is what his next book Cash The Crash is going to be about. Has anyone read it?


Anonymous said...

guys, the other day read somewhere that bangalore current population is 8,084,676. lets assume on an average there are 4 memmbers in a family. effectivly the demand is just 2 lakh homes. considering bangalore has lots of apartments and apartments have a lot of units, i dont see less supply here.
but people have been talking about demandsuply theory all these days.
i am just curious to know how thats possible

Anonymous said...

sorry. it comes to about 20 lakh homes.

Shailesh said...

Raju hid evidence in cars, kept them running

Hyderabad: The Rajus loaded land documents into vehicles, which were always mobile, so that they do not fall into police hands.

While the number of vehicles used for transportation of documents is said to be six, police could trace only one Innova. They also traced six secret locations where some documents were stored.

All property activities of Ramalinga Raju were taken care of by a group of Rajus, a community known to be shrewd in businesses like seafood, poultry and agriculture.

DVGK Raju hails from a village near Ramalinga Raju's native place of Bheemavaram in East Godavari district of Andhra Pradesh.

He told police that he planned to keep the papers mobile after B S N Raju, another brother of Ramalinga Raju, instructed him to keep them away from the police.

Government should announce huge reward for person who can turn these vehicles in. Government should liquidate all Land assets belonging to Raju family and give money back to lenders.

Shailesh said...

Demand Supply mis-match - What a joke argument?

Has anyone seen size of India? We have huge amount of land for residential use. Whenever I have flown over India, I get amazed that with so much of available land, our citizens are struggling to find just 500 sq ft apartment. The basic issue has been lack of infrastructure. I think with government allowing large township developments, private infrastructure will develop.

For industries like IT, there is no need to be in prime area. One can develop office and housing in Timbuktoo. You just need satellite antennas. People paying premium prices thinking their location is unique and will retain value, are in for huge shock. No location in world is that unique to deserve such lofty valuation.

Shailesh said...

Rajus sold land worth Rs 1000 crore

India Infoline News Service / Mumbai Jan 24, 2009 08:45

This fact was stumbled upon by investigators of the stamps and registration department looking into the land dealings at the behest of the CID

It's high time, Govt of India, tackles black money involved in Real Estate deals.

Bharat said...

To some extent, I am reminded of the time when ration cards used to exist and everything used to be so expensive because of black marketeers and hoarders.

The real estate market is a bit like that. Builders and Brokers conspire and collude to buy out all available land, form cartels, conspire with speculators/investors and moneylenders to create an artificial demand. The result of all this is that they manage to hike the home prices 500-1000% up within a short space of time. Unfortunately, this time around this coincided with the RBI/Banks lowering the rates, sort of like option ARM's here in US. A lot of people got suckered in this scam/bubble. Demand-supply had nothing to do with it..this is pure cheating and hoarding. But, for me the question always has been - How long can they hold up these rates? Because, the cost of holding rates up will eventually make these artificially bloated rates unsustainable and therefore they will collapse. So wait for the bubble to implode and collect the pieces for pennies. Essentially, the theme Vulture keeps harping on - Wait and buy at 50% discounts.

The rest is all stories - demand and supply, growth stories, rates coming down, etc..don't get suckered by those.

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