Sunday, February 05, 2012

Ajit Dayal on real estate prices in India

I think someone with some real guts pointed out why Real Estate prices in India are artificially kept high by Politician / Builder nexus.... The unfortunate thing is there is no outrage. All PSU banks have large amount of money to Builders, and not to needy folks who want to start business, generate employment, etc... GOI has given tacit support to such an act. This situation needs to come out, unfortunately Main Stream Media has not reported this in detail.



Video Link

50 comments:

Anonymous said...

I'll repeat what I've said earlier. RE in India is a supply side monopoly which is tightly controlled by politicians and their enablers/sponsors in the private sector.

People are simplistically look at the demand side of the equation and reaching false conclusions.

Jobs or no jobs, RE in Mumbai is not like RE anywhere else. After Switzerland, this is the next favorite parking spot of ill gotten gains of the so-called industrialists, businessmen, politicians.

Nothing short of a revolution will bring prices down in line with what people with honest incomes can afford.

Let the CBI track all financial transactions associated with RE and let the rot be exposed. Till then a 5-10% swing here or there is hardly going to change the affordability by much.


I have forwarded this video to all my Indian friends and family. Finally a voice of reason instead of the usual dumb comparisons between NY, Tokyo and Mumbai etc.

polt said...

@Anon - "I'll repeat what I've said earlier. RE in India is a supply side monopoly which is tightly controlled by politicians and their enablers/sponsors in the private sector."

Why then did prices fall 30-40% in 2008? What happened to the "tightly controlled" sector then ? And, where was the control in the 90s, when RE pretty much tracked inflation?
If you are going to present a thesis, make sure it fits data points for a reasonable amount of time and stands up to empirical scrutiny.

Every bubble every time throughout history is justified by some argument or the other. Now we have the "supply side monopoly" thesis :))

Anonymous said...

Its true that banks were supporting Real Estate, having lent huge sums to them - and therefore afraid of being pulled down due to inevitable defaults last year.
It is also true that the RBI has now asked banks to stop this sort of practice and to refuse further loans to builders. Hence one now sees a glut of empty flats on offer at considerably reduced prices in cities like Bangalore.
Let's hope the time comes when there is a measure of honesty in our politics, banking system and private enterprise so that honest money can buy its roti, kapda aur makan!

Anonymous said...

If you are going to present a thesis, make sure it fits data points for a reasonable amount of time and stands up to empirical scrutiny.

What reasnable amount of time do you speak of? RE has been in a clear one way trend in the past 12 years (that's half a generation) barring a few months which as already pointed out has had negligble overall impact.

If anyone needs to make the case it needs to be the cheerleaders for a crash who have been declaring reversion to the mean for the last 5+ years.

And yes, in the long run things do revert to mean but then in the long run we are all dead as well.

So unless you are an investor, listen to what Ajit says and either take action to get meaningful reforms enacted or accept the status quo and proceed with your life's choice as an owner or renter.

polt said...

@Anon - "RE has been in a clear one way trend in the past 12 years (that's half a generation) barring a few "

Classic case of data mining to suit ones argument. Prices are rising for the last 12 years, so who cares what happened before on a longer time scale. That does not fit into my thesis, so I will just ignore it !!

"If anyone needs to make the case it needs to be the cheerleaders for a crash who have been "
Prices in Chandigarh are down 30% last year, luxury home prices in Mumbai are down 18%, Prices are flat or slightly negative in Bangalore/Hyderabad. Also see http://www.nhb.org.in/Residex/Data&Graphs.php .
Bulls here say that IT will never let housing down. Surprising then that Bangalore and Hyd are still below their 2007 peaks.

BTW, the bulls really ought to get an OpenId or atleast use a consistent Name as an identifier. Almost all the housing bulls post anonymously.

polt said...

For the record, I agree with Ajit Dayal that a freer market will help. Strict zoning accentuates both the bubbles and the bursts.

Off topic, Ajit is one of the better asset managers in India. The Quantum equity index fund is probably the lowest cost index funds in India and also has a low tracking error.
His thoughts on asset management in India are also worth reading.

Pawan said...

RE in India is a supply side monopoly which is tightly controlled by politicians and their enablers/sponsors in the private sector.

I used to think like that too but then is it true?

Politicians makes money when they approves a project. So logically, the more projects a politician approves, the more money he makes.

Case in point is UP. It is possible that BSP loses this election so it was best for them to make hay while they were in power. And they did that. Huge number of projects were launched in Noida, Greater Noida, Yamuna and Ganga expressway and so on.

We have all heard of the story of the greedy farmer who killed the goose which laid golden eggs because he wanted all the eggs at once. Politics is a tough game and people can remain out of power for very long. Fortunes can change dramatically. Therefore, I would argue that as soon as a politician comes in power, he mush approve large number of projects, get his cut and send the money to swiss banks while he is still in power.

I can bet that as soon as BSP loses UP elections, CBI will be after Mayawati. Its not easy even for the all powerful ones my friend.

Anonymous said...

@polt

i think you r not clever enough to understand situation in 2008-09,, property price never fall but publicity and media play game and create environment for loksabha 2009 election and 6pay will create demand that all know babu neta and builder so 2008-09 they create smart investment agenda,,then everything is clear.. now property price will come down 10-20% near loksabha 2014 not matter because prices are ran 500% to 800%

polt said...

54% of new apartments launched in the affordable segment lying vacant in NCR

http://economictimes.indiatimes.com/markets/real-estate/realty-trends/54-of-new-apartments-launched-in-the-affordable-segment-lying-vacant-in-ncr/articleshow/11776137.cms

Are we still sticking with the supply side monopoly argument? Monopolies would never allow such oversupply.

How about the "high population" argument :))

Anonymous said...

Babus can do anything, but cannot control market. Most important factor in Demand - Supply is ALWAYS.. I repeat ALWAYS is affordability. If RE prices are not going to correct, either people will live low quality life, or revolt or move to greener pastures.

Anonymous said...

Or become bank-owned slaves like much of the Western middle-class. I think that's the agenda of the financial elite, to milk the middle class cow through out it's productive life.

In US you can get a 40 year mortgage! Now you can add your mortgage payment to the "death and taxes" certainty principle.

I think Indian banks started off at 10 years and now we can get 20 years loan. If Indian banks can further push the period down to 30 or even 40 years then there you have it. Affordability solved, lol. Party on!

Anonymous said...

Affordability is not equal to having credit, it may seems so on surface.

One needs to have enough earnings to pay credits/loans. In USA many have earnings to pay interest on mortgage loans... let interest rates raise to India's level, then we are talking. BUT in India interest levels are already high compared to earnings.

On another note, what is harm in staying on Rent if rents are far lower than buying EMIs.

RealityFool said...

@12:09 PM

30 year loan implementation has already started in SBI.



http://www.rediff.com/business/slide-show/slide-show-1-sbi-hikes-home-loan-tenure-to-30-years/20111021.htm


Nobody has credit problem now.

Anonymous said...

yoohooo !! What USA achieved in 20 years, India will achieve in 2 years!

30 years is great, but at the pace RE prices are, soon we should be seeing 40 years.. no surprises here.

Any idea if this mortgage is recourse or non recourse?

skeptic's ghost said...

@Polt @Pawan

When there is a black swan event like Greek/Portuguese/Irish all out default or a Iran-Israel war in the next 6 months - guess what will happen to the Indian Rupee? 50, 60 might even fall to 70

In terms of INR I really dont see Indian property go back to pre 2006 prices.

Here is US the market has already fallen in many pockets to sub bubble levels. In Japan it has been falling since 1990. Will the same happen in India once the market contracts?

Anonymous said...

@ Any idea if this mortgage is recourse or non recourse?

All this legal mumbo-jumbo is for a law-abiding nation. In India things happen much faster out of court and on the street.

FWIW, your banks official policy will most likely say something like this:

"In the event of default i.e. if the amount due is not paid by due date, the customer will be sent reminders from time to time for payment of any outstanding on his loan account, by post, fax, telephone, email, SMS messaging and/or through third parties
appointed for collection purpose to remind, follow-up and collect dues.


What they won't mention is that these 3rd parties are also referred to as "bhai's" in the vernacular.

If it is a movable property, like a car, it's possible for you to wake up in the morning and find it has simply vanished...

In either case, good luck registering a complaint with the police or following up in court when this happens.

polt said...

@ Any idea if this mortgage is recourse or non recourse?
Loans in India are full recourse. Your PPF and PF are however protected from creditors in case of a default/bankruptcy.

On another note, the screws tighten further - Banks now will not fund registration and stamp duty through the home loan (i.e. means more down payment)- http://www.business-standard.com/india/news/your-dream-home-gets-even-more-distant/463923/

But what I found interesting was this comment - "Personal loan is the easiest option. Most home loan borrowers, anyway, depend on it to fund 15-20 per cent initial down payment," says Adhil Shetty of Bankbazaar.com.

This means people are borrowing to pay the down payment too!. Remember the zero-down loans in the US. That did not end well.

Anonymous said...

The only people who can afford a house in India (with white money) are the ones who are not staying in India

Pawan said...

@skeptic's ghost
Will the same happen in India once the market contracts?

In INR terms I don't know what happens. I was looking at some charts where I saw that only two currencies in the world have appreciated against or remained flat against gold : swiss franc and Japanese yen.

So in Japan, property prices have corrected against gold. That will happen in India too.

In US, incomes are flat for most people. I was reading that households are poorer today than 20 years back.

As for INR, I don't know where that goes. So far incomes have been rising in INR terms and so are rents. However, rental growth has been like 10% per year which is in line with inflation. Give or take a percent or two. Asset price growth however is totally out of line.

The most reliable method according to me should be EMI to rent ratio. This ratio is 5 or more today in Gurgaon and I believe not much better anywhere else in major Indian cities. This has to correct.

I would say we have seen the highest RE prices for the next 5 years in 2011. And if that is true, speculators will soon run for cover. I know people who have borrowed money from unofficial channels at 18-24% per year. Which means if prices don't rise more than that every year, these people are in red. Lets see how it plays out.

Pawan said...

see this too http://www.livemint.com/2012/02/05230549/Let8217s-not-recast-loans-t.html?h=A1

shailesh said...

Polt & Pawan:

Supply side restrictions are mainly limited to Mumbai. Being an island city it can not easily expand in all directions. The only solution is building highways and train system that connects farflung places like Virar, Kalyan, Panvel, Alibaug with Mumbai. This is where Government has been very week. That is the reason why 90% of cost of housing is basically cost of Land in Mumbai. That has resulted in large amount of population living in Slums. Politicians play double game, i.e. they control (restricts) how much FSI is given, and also promise free homes for slum rehab. Basically, every building project will have some connection with politician who is involved in approvals etc... Since politicians are themselves either builder or partner with builders, it is in their interest to restrict supply.

It is difficult to do this in other cities in India, as they don't have geographic constraints. So, I don't think this holds true in most of India. The challenge is when someone has grown whole life in Mumbai, has complete social + family network in Mumbai, it is very hard to leave Mumbai and move to other city.

Anonymous said...

The challenge is when someone has grown whole life in Mumbai, has complete social + family network in Mumbai, it is very hard to leave Mumbai and move to other city.

Correct - difficult (but not impossible) to move to other city and not other country. Also, lots of my friends born, educated, worked in Mumbai have moved to Pune, Bangalore for good. It's all about opportunities.

RealityFool said...

"Offshore means India" is changing.

EPAM is the IT Company has workforce from Poor European countries.

http://www.epam.com/

It has shown good growth last year and filing its IPO in NYSE

Rest of the world is slowly catching up with IT.

In the long run, India's core business IT will not be with us.

What else is India's goods and services is know far?

What innovation we have?

Anonymous said...

I think we should make Robert Vadra prime minister now. He will use his kind heart and the large stake in DLF to make real estate affordable for all of us.

Other related suggestions, are-

1. Turn the country into a monarchy and make Soniaji Queen and Priyankaji Princess.

2. Make Rahulji next in line to the cock throne. Peacock throne is long gone, taken by foreign invaders under a process called reverse-FDI. Soniaji is the new pioneer of reverse-FDI.

3. Present PM and ministers can be turned into doormats at the new queen's palace, some are already that.

4. Digvijay and Manu Singhvi can be national tweedledum and tweedledee.

5. Disband army navy airforce. Outsource national security to Dawood Ibrahim.

6. Sell ISRO to highest bidder. Use rockets during diwali only.

7. No auctions for spectrum. Give it away to the biggest a**hole in the world. Hold competetion inside parliament to pick winner.

8. Send Anna, Ramdev, Gen. VK Singh etc. to Afghanistan, their honesty can be used to fight the Taliban.

9. Clone Kapil Sibbal - two liers are better than one.

and last but not the least.

10. Vote in UP elections, as usual, only on caste and communal issues. On your way out remember to pee on the wall and then spit the paan out on your pee.

Anonymous said...

The big problem of high RE prices is, too much capital gets tied up, affects the velocity of money, thus stunts GDP growth. The apathy of GOI is mind-boggling.

Anonymous said...

Instead of buying expensive Real Estate in Mumbai, why don't you guys invest $500,000 in USA and get Green Card in 6 months. This is a much better investment than any real estate flats in mumbai at these prices.

polt said...

@Shailesh - "Supply side restrictions are mainly limited to Mumbai."

This seems unlikely. By most accounts Mumbai has around 45 months of inventory.
This is hardly the sign of a constrained supply.
If land is 90% of the cost, then what we have is a land bubble. It too will burst/deflate.

Anonymous said...

@ 9:16 AM

Invest in US? Most people with that kind of money in India have accumulated it through some shady if not downright illegal dealings.

US green card for these folks is a liability as now you have to report both US and foreign income to IRS and while it's not the perfect system the US prosecution and legal system is much more stricter/efficient than India.

If you have crores lying in your bank/stock accounts you're a big shot in India and can afford to buy off all kinds of goods and services. Out in the US you're a nobody and will have to do menial chores like drive yourself and do your own laundry.

Not to mention, no amount of money can buy you a fair skin and blue eyes. At least in India, no one will tell you or your children to go back to where they came from though if you are a north indian in Mumbai that may not necessarily be the case ;-)

Pawan said...

http://www.marketwatch.com/story/asia-real-estate-bull-turns-bearish-2012-02-07?pagenumber=1

Quote from the article:
“Everybody from sweet manufacturers, car manufacturers, to the guy who makes fireworks suddenly wants to be a property developer,”

polt said...

From the article posted by Pavan -
"as well as a slow-but-steady decline in Hong Kong home values, which eventually fell by 70% before a recovery set in. "

Evidence that land constraints and high population densities do not prevent bubbles nor the aftermath of massive corrections.

Pawan said...

http://www.reuters.com/article/2012/02/08/india-autos-sales-idUSL4E8D834620120208

quoting from the article:
"The car industry is too sensitive to interest rates, and we don't see interest rates coming down quickly," Vishnu Mathur, director general of the Society of Indian Automobile Manufacturers (SIAM), told reporters on Wednesday.

Now that is truth. Compare this to the BS we hear from RE industry guys day in and day out.

Anonymous said...

@ 11:50 PM

So by the logic prevalent on these boards it would mean that we should all expect car prices to drop any day now that sales are slowing?

Ankan said...

Great post, enjoyed reading

Anonymous said...

So by the logic prevalent on these boards it would mean that we should all expect car prices to drop any day now that sales are slowing?

yes, if they want to keep their sales up and want to sell their cars.

Also try increasing car prices 500% then ask your stupid question.

Anonymous said...

Also try increasing car prices 500% then ask your stupid question.

Car prices are already jacked up so you are paying 200% for CBUs. Still the folks who want these and can "afford" the EMI will take out car loan and buy.

I'm sure these buyers know that they are paying double price than what someone in US pays.

So why not make your same intelligent arguments. Infact, if anything this would be a direct apples to apples comparison!

Anonymous said...

Excellent conversation going on here. Mumbai/Any city is not different on how it reacts to sales pressure. To the core they all are same. Yes market do get manipulated all the time, higher the degree of manipulation greater the repercussions. If this artificially inflated ponzi scheme continues longer, the down cycle will be longer and harsher. Around the world the RE bubbles have popped and Mumbai or any inflated city will not be spared. The gains and wrath should be experienced. The investor who have timed the market correctly are already out, the rest will be holding the bag and face the wrath.

Anonymous said...

That car sales argument was interesting.

Indeed, car sales are going down. But a few days ago, I found out that someone who doesn't have much of an income had bought a mid-size car through a loan. His family might have pitched in too.

India has changed. This is especially for all those guys sitting in the US and pontificating on India. Yes, there is a slowdown in India but people are crazy to buy everything that they dream of. It's a frenzy. It's like the house-buying frenzy in the US in the early to mid 2000s (in which some of our H1-B gurus were caught too). It's a repeat and I think it has some legs unless there is some huge collapse because of a war in the Middle East.

I am not a bull. I am actually bearish but I am increasingly feeling that prices will not go down very fast. The dynamics of the market is like that. There are just too many people who are dying to make their dreams come true at whatever cost. They are also extremely optimistic compared to people in the US.

Anonymous said...

Somebody asked the bulls to get an OpenID or identify themselves. I would love to see the gurus from the US on H1-B and greencards to identify themselves as well.

I used to live in the US too and I understand your vulture-like attitude. You think that you can come and swoop up everything once India collapses. Good luck with that.

Again, I am bearish but I hate greedy vultures more. Please stay back in the US and mind your own business.

Anonymous said...

did you know the people who bought car pushing themselves (and their families) to financial limits are the ones who will eventually let go car when interest rates rise. Why? because they have used all life lines in one go.

Try buying car when interest rates are up and difficult to get loans. Car prices have to come down.

This applies to housing market also.

In USA more than 90% people buy cars on loan. Why? because car is necessity there and you HAVE to buy it. But when prices go northwards, you see decline. Seen what happened to Hummer (because of gas price). "Affordability" drives the whole game. Control "Affordability" (with credits) and you control demand-supply.

Anonymous said...

I used to live in the US too and I understand your vulture-like attitude. You think that you can come and swoop up everything once India collapses. Good luck with that.

Looks like grapes gone sour. Keep ranting.

Anonymous said...

The vultures can't wait to swoop down on India with the dollars saved from ass-kissing jobs in the US.

No sour grapes here. But I find your attitudes funny. Your children are never coming back. Just stay there and mind your business.

Anonymous said...

The vultures can't wait to swoop down on India with the dollars saved from ass-kissing jobs in the US.

No sour grapes here. But I find your attitudes funny. Your children are never coming back. Just stay there and mind your business.


Sorry, didn't understand your rants. What is funny and what is swooping and what is with children not coming back...

BASICALLY WHAT IS YOUR POINT? sob sob...

Anonymous said...

Yeah it hurts to look in the mirror and find that you are nothing but a greedy NRI who wishes ill for India.

I'm not sobbing. Just laughing at your uncontrollable greed. And I am asking you to stay away. Carpetbaggers are not welcome here.

Anonymous said...

Yeah it hurts to look in the mirror and find that you are nothing but a greedy NRI who wishes ill for India.

How does NRI wish ill for India? I feel Resident Indians wish far more ill and dangerous than NRIs. Seen yourself in mirror ?

I'm not sobbing. Just laughing at your uncontrollable greed. And I am asking you to stay away. Carpetbaggers are not welcome here.

No, you are not laughing. your rants are more of sob, envy, angry, jealousy. any yes, how are you going to keep NRIs away?

Sorry bloggers, to deviate from RE topic, but this guy is amazingly disgusting. I like him to come to RE point.

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RES said...

Ajit Dayal is giving views on real estate prices. Useful post

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