Real Estate market in India

Is real estate next in line to collapse?
Unless govt deflates the housing bubble in an orderly manner, the collapse by market mechanism will surprise generations

While the spotlight so far has been on the rupee and the equity markets, real estate prices have started to bear the impact as well. A Business Standard report points out that of the 26 cities surveyed by the National Housing Bank (NHB), as many as 22 including Delhi, Mumbai, Pune, Bangalore and Chennai saw a drop in property prices during the April-June quarter, compared to the first quarter of this calendar year. An all-round squeeze in liquidity and dearth of buyers have led to a fall in prices across the country.
 
Developers who were holding on to their prices despite sluggishness in demand have blinked first. Yet the NHB chairman and managing director 
RV Verma feels that there is more to come.
 
A report by 
Manish Bhandari of Vallum Capital says that the endgame of speculation in Indian real estate has begun. Bhandari says that a multitude of factors are converging after a decade, setting the stage for a deep correction in real estate. The story in India has all the ingredients of a making of a bubble a la Mississippi Scheme, the South Sea Bubble or the Tulip Mania.
 
Real estate prices in India are among the highest when compared on a per capita basis. Rent yield in India, which can be used to compare returns within real estate across countries as well as to compare across asset class, is one of the lowest in the world. Indian real estate earns a rent yield of only 2.7 per cent compared to 4.7 per cent in the US and 4.5 per cent in Japan.
 
Within emerging markets, Indonesia has a yield of 9.3 per cent while Philippines real estate investment earn a rent yield of 8.6 per cent. The only other country which has a 2.7 per cent yield is China which is already facing a bank-fuelled bubble like scenario in its real estate sector, which its government is desperately trying to control.
 
RBI is sucking out liquidity like a sponge and the sector that will be the worst affected is real estate. Bhandari says that the fall in property prices is likely to start from the deleveraging cycle by Indian banking sector which is running a multi-decade investment to deposit ratio of 108 per cent. Balance sheets are expected to be deleveraged over the next three-four years. The previous deleveraging cycle in 1997-2003 saw real estate prices correct by 50 per cent in Mumbai Metro Region.
 
Adding to the liquidity crisis is the likely exit of private equity (PE) players from the market. Average life of private equity in real estate is seven-eight years. Year 2013 marks the beginning of private equity returning back to shores. Manish says that PE players entered India at an exchange rate of 45; they will now be exiting at around 70 levels a loss of nearly 50 per cent in currency conversion itself. The exit of PE funds will create a distress sale situation in the real estate market, shortly leading to depressing price situation for the next 18 months.

Bhandari feels that unless the government deflates the housing bubble in an orderly manner, the collapse by market mechanism will surprise generations on how a nation on its way to prosperity by speculating on a piece of land eventually lost a fortune.
Shishir Asthana  August 28, 2013 Business Standard






Home is not investment- Definetely not second home
YOUR HOME WILL NOT MAKE YOU RICH

I’ve come to believe that, for millions of Americans, a house is a large liability masquerading as a safe asset.
Not just because of the recent housing crash, although what an eye-opener that was.

But also because, even after watching the value of their homes plummet over the past decade, average Americans still believe their homes will make great long-term investments — even ones to rely on for retirement.

A year ago, I traveled to Yale University to meet up with economist Robert Shiller.

Shiller — who just won a Nobel Prize — is regarded as the world’s foremost housing expert.

He’s merged historical data with deep insight into human psychology to offer some of the best housing analysis anyone’s ever produced.

Not only is Shiller brilliant, but he’s also one of the nicest guys I’ve ever met. He’s easy to talk to and puts things in clear, easy-to-understand language. As we sat in his office, eating donuts and drinking coffee, I asked him, in the broadest terms I could, what homeowners should expect out of their homes in the long run.

“The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. It was not informed by good history,” he said. Most people now agree on that much.
“If you look at the history of the housing market, it hasn’t been a good provider of capital gains. It is a provider of housing services,” he explained.

By that, he means homes give you a place to live, a place to sleep, and a place to store your stuff.
But that’s it. Americans believed that the value of their homes would increase over time above the rate of inflation.

And that, Shiller said, is wrong.

“Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged,” he said.

Shiller — a pioneer of behavioral finance and one of the calmest, most levelheaded economists I know — became animated — almost irritated — at this point. Debunking the notion that housing is a great investment is one of his favorite topics.


 “Why is that?” he asked me. I really didn’t know.

“Well, I think you have to reflect on the fact that they’ve done it before,” he explained. “Home prices declined for the first half of the 20th century [adjusted for inflation]. Economists discussed that back then. Why are they going down? The conclusion was ... of course home prices go down. There’s technical progress. They are a manufactured good. Back in 1900, homes were handmade by, you know, craftsmen. But in 1950, we could get all kinds of power tools and prefab. And [construction workers] were just better in 1950 than we were in 1900. So of course prices will go down.”

Shiller also mentioned that certain homes go out of style over time, dragging down prices. “What kind of houses will they be building in 20 years?” he wondered aloud. “They may have lots of new amenities. They will be computerized or something in some way that we can’t anticipate now. So people won’t want these old homes.”

His animation peaked with a line I’ll never forget:


Let that sink in. Home prices may decline for the next 30 years.

The best thing about Shiller, and what sets him apart from your typical pundit, is that he has data to back up every point he makes.

In the early 2000s, Shiller wanted to see what nationwide home prices looked like over the long term. He was shocked to learn that no one had ever actually put that data together.

He dug around in libraries, crunched as much data as he could, and came up with an index that measured nationwide home prices going back to the 1890s.

This was truly a first. “The strange thing is, nobody else had ever made a plot like that. I can tell you, no one had ever seen that picture,” he told me, shaking his head in disbelief. “People plot all kinds of data. Why wouldn’t someone have done that? I still haven’t figured it out.”

The chart, measuring nationwide home prices adjusted for inflation, was this one:


From 1890 — just three decades after the Civil War — through 2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%.

The reason Shiller warns that home prices could fall going forward is the simple observation that, heck, they’ve done it in the past. It’s what history tells us to expect out of our homes.

Let me reiterate what a home does: It provides a place to live. A place to raise your kids. A place to spend the holidays with your family. A place to have a barbeque with your neighbors. Even a place to rent out. That has tremendous value, of course. Shiller owns a home. He’d buy another if he needed one. “Basically, if I were in the market right now because I wanted a house, I would buy a house,” he said.

The problem is that Americans have come to expect much more out of their homes than just a place to live. In 2010 – years after the housing bubble burst – Shiller’s surveys showed Americans still expected their homes to appreciate by more than 6% a year over the following decade. If history is any guide, that’s probably about twice as fast as they’ll actually appreciate. Despite the housing crash, people still think of homes as investments that are capable of growing faster than inflation.

Since a home is most Americans’ largest asset, you can see how this becomes a problem. When you have inflated expectations about the largest asset you own, you walk down the path of financial disappointment. The value of American homes $7 trillion from 2007 to 2011. With it went the retirement hopes and dreams of millions of Americans who saw their net worth decimated.
Everyone should live in a home they can afford and that provides the lifestyle they want to live. But when your home makes up the majority of your net worth, you run the risk of not being able to grow your total assets by enough to sustain the lifestyle you desire.


There’s not much historical evidence on your side.

It all comes back to good ol’ diversification. One of the biggest mistakes Americans made over the past decade was having too much of their wealth tied up in their homes and not enough in assets that produce income or grow faster than inflation, like stocks and bonds. If Americans’ expectations about home prices are any indication, this will continue to be a mistake over the next decade.
Are you making this mistake?

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 ABOUT MORGAN HOUSEL


Morgan Housel is a nationally-syndicated financial journalist and analyst at The Motley Fool. Morgan’s words have appeared in the New York Times, TIME, Wall Street Journal, and Washington Post. He is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and was selected by the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013 he was a finalist for the Gerald Loeb Award and Scripps Howard Award. He holds a B.A. in Economics from the University of Southern California and currently resides in Baltimore, Maryland.