Real Estate crash in India

Estate prices have kept moving upwards relentlessly even as other asset classes have languished. Corporate mis-governance and corruption has driven investors away from equity, while bond and fixed income investments have been less attractive because of high consumer inflation. This has made gold and real estate the preferred choice of investments in India. The government is grappling with a massive trade and current account deficit on account of billions of dollars of gold imports. The government has repeatedly (and might I tell stupidly) raised the import duties on gold. They are currently now 8%, which makes smuggling of gold a very attractive option considering the high value to volume ratio for gold. Real estate on the other hand has risen by more than 50% in the last 3-4 years, completely decoupling itself from the income levels. Rental yields in top metro cities are just 2-3%, as the sky high prices of apartments and houses make rental yields very low.

Read about Real Estate companies in India.

Loss of Corporate Buyers

Now even the top priced real estate in India in metro cities of Mumbai and Delhi are seeing a crash in rental yields of 20-30%. The pathetic performance of the economy is one of the main reasons why these rentals are falling. The corporate houses across India have seen a 0% growth in profits and are cutting down heavily on discretionary spends. These apartments which were taken on lease for top executives have no buyers now. The companies are cutting down on executive perks, at they grapple to adjust to the new economy with almost no growth. There is little justification to pay $10,000 a month for rents when the company is making losses.

Recent data released by RBI has shown the real estate pockets in the country have started to show a slowdown in price growth.

There are lots of cities and towns which are now seeing a reversal in prices. Only top cities with lot of investor interest have maintained their price levels. It is not surprising to see the first break in the real estate bubble in India. As the US Fed removes its easy money policy, real estate in India could collapse dramatically.

I would advise reader to go through the capitalmind site where the author has written an excellent piece on real estate bubble in India.

Real Estate Bubble in India

Here are some of the reason that I think Real Estate Prices are totally irrational in India:

1) Corruption, Opaque Regulations, Use of Black Money – Real Estate in India is a Cesspool of Corruption and even India’s Prime Minister has also accepted it saying that high Stamp Duty on Real Estate Buys result in the preponderance of Black Money in Real Estate Deals. Due to the massive price appreciation and huge valuations, Land Scams have become quite common with Chief Ministers, Generals, Top Bureaucrats all involved in the murky environment of Real Estate in India.Valuing the industry and making a real estate investment remains one of the most difficult investing tasks in the Indian Stock Market. Even Fund Managers are staying away from the Sector due to lack of trust in the Financial Statement given by the industry.

2) Global Real Estate Bubbles – One of the reasons for the sharp price rise in Real Estate in India is that Real Estate in many parts of the world are a bubble. Allowing Foreign Money into Real Estate in India has made these PE investors pay the same valuation for properties in India as outside. Note many of these “Real Estate” Private Equity Investors have yet to recover from the fall in property prices in the 2008 crash though many have been saved by the Bernake reinflation.

3) Tax Laws and Policy Stupidity – India’s Tax Laws impose high capital gains on land that is sold and not reinvested back into real estate again. That keeps the huge sums from gains in the real estate to be funneled back again.Otherwise a lot of the money would have gone elsewhere bringing the Real Estate back to earth again.India also allows an exemption of Rs 1.5 lakhs ceiling on interest payments on Real Estate Payment giving an impetus to investing in RE. Note such misguided laws were a leading cause of trouble for the Real Estate in USA.

4) Local, State Laws on Real Estate prevent Market Forces of Demand/ Supply to Operate – India’s Local and State Laws dealing with Real Estate are as bad if not worse than Laws at the central Level. These Laws in most cases prevent the normal working of the Market Forces of Supply and Demand. The biggest proof of this in the fact that the Rental Yields on properties on India are way lower than if you took out money from selling the real estate investment and putting in a safe government bond. People in Mumbai the biggest real estate bubble market in India have stopped buying houses and going for rental leases.

5) Peer Pressure,Cultural Factors – A lot of people buy real estate seeing other people buying at inflated prices. Not exactly a classical economic argument given that it assume people are rational and make decisions based on value. It has become acceptable to pay a huge amount of income as EMIs seeing other people do the same. Does not matter the benefits are hardly worth the costs. Cultural factors like buying real estate preference also have played a big role. In India people avoid stocks, bond but prefer real estate and bank fixed deposits.

ET

Demand for rented homes has halved and rents are down by 25% in several popular residential localities in Mumbai, Delhi and Bangalore, as India Inc tightens housing budgets in its battle against economic slowdown.
In Mumbai, rentals in marquee buildings like the sea-facing Haveli on Malabar Hill, NCPA Apartments at Nariman Point and Maker Towers at Cuffe Parade, where rentals range between Rs 5.5 lakh and Rs 12 lakh a month, are down by up to 30%. In Delhi’s Vasant Vihar, West End, Chanakyapuri, Shanti Niketan and farmhouses in Chattarpur and West End Greens.