Most of the people are of view that in India real estate prices will never come down due to number of reasons including demography, shift of population from villages to cites, increase in earnings, economy growth and biggest reason that lot of black money that is generated through corruption is finding its way in Real Estate. So people who don’t own property are asking out of frustration that “will Indian real estate bubble ever burst?” – “will we be ever able to afford a decent property for our family?”. OR they should take a plunge at whatever rate they are getting? Let’s try to touch few related issues…
This is just first in a series of articles – next post will talk about affordability of property.
My friend bought some plot in 2005 at Rs 1800 per square yard sold it in 2011 at Rs 13000 per square yard. From sale proceeds he bought another plot at Rs 6000 per square yard & in less than 2 years price in that area is Rs 15000 per square yard. It means in 6-7 years his money has grown 16-17 times or 55-60% CAGR. Do you think he is genius? YES, if I don’t share this story… One of my clients bought some property for Rs 25X & now it is valued 300X in around 3 years so 12 times or 120% CAGR. So do you think he is genius? Yes if I don’t share this story… one of my relatives bought some agricultural land for 7X and now it is quoted at 100x in less than 2 years so 14 times or more than 250% CAGR.
Bull Market Vs Genius
You must be listening similar stories from your friends, relatives & property experts on media. But question still is – are they genius? May be…. It’s important to understand that everyone makes money in a bull run, if he participates in that asset class – my neighbor told me that value of my house has tripped in last 4 years. So one should remember that it’s because of bull market they are making money & price increase should not make them insane. Something similar happened with equity investors in 2007.
But in all above examples people have started feeling that they know what will happen next & which makes me worried. Friend is saying soon one new road will be connected to that colony & price will be Rs 20000 per square yard, client is saying when I can earn 100% from property why should I continue my business and relative has already converted all his financial savings in real estate & now planning to take loan to buy more. Again the question is – are they genius? Answer is NO….
Predicting future price
Some real estate report recently said “The real estate sector will continue to remain an attractive investment destination with the possibility of prices in residential areas appreciating by 91 to 145 per cent in select cities over the next five years.”
Their predictability of price reminds me of various reports published in Dec 2007 “close to budget SENSEX will be 25000”. OR dialogue from movie BORDER – Pakistani soldier after arrest “humain to yah bataya gaya tha subah ka nashta Jaisalmer main, lunch Jodhpur main & dinner Delhi main hoga” 🙂
Indian Real Estate Bubble
So should I want to say Real Estate price increase is actually a bubble? And if it’s a bubble – Warren Buffett said “For every bubble, a pin awaits”. No because I can’t predict anything & second is related to size of bubble which you can easily understand from Carl Richard’s image.
He said “The supposed ability to spot bubbles is just another way of talking about market timing. Market timing, while not impossible, has certainly proven to be highly improbable.
One of the big problems with some of the recent bubble spotting methods is that they work perfectly, just so long as you’re looking backwards. Many of these techniques are based on extensive research that relies heavily on back-tested models.”
But someone has tried to predict Indian Property Bubble – from Wikipedia “Economists have expressed opinion that the property market in Indian cities is in bubble-state and is expected to burst by November 2014.”
Another Story “India’s property prices- now falling, in real terms”
Recently, Indian property price increases have slowed sharply. Of the 15 major Indian cities covered by the NHB Residex, nominal house prices rose in 9 cities and fell in 6 cities during the year to end-June 2012. However, when adjusted for inflation, house prices fell in more cities (11 cities) than rose (4 cities).
This means that every property or real estate piece does not grow at the phenomenal rate, if you see in Mumbai & Bengaluru the prices have almost stabilized. And “stabilization” for real estate developer means a recession because he is not making more number of deals. Also an indicator to check is demand vs supply phenomenon in the city. If a city is already flooded with projects in city center vicinity, why will someone plan to live in suburbs? So if demand is met, the oversupply will crash the price. Just read somewhere that 65% of the properties in Delhi NCR & 35% properties in Mumbai are in hands of speculators. Does that indicate something – no because no one can predict size of bubble. (even if its there) Check real estate bubble burst of US & Japan.
Big Myth: In India Property Price will never come down – will discuss this in next post.
If you have any question or points add that in comments – I will try to cover your points or concerns in next post.