Rent for a flat is Rs1.75 lacs per month, which is Rs21 lakhs per annum. The purchase price of the same flat will be in range of Rs5 to 5.4 crore, which gives a rental yield of 3.9-4.2%. Given FD rates of 9%, you can sell the flat, put in FD and stay on rent – if you are a rational economic person, unfortunately most of us are emotional beings when it comes to owning our house.
Real estate prices are not showing any signs of a correction despite unsold inventory and ‘doomsday predictions’ of the debt level of the real estate developers. I recently read an article in the Mint which mentioned that property sales in Mumbai have fallen 70%. If anyone believes in the theory of demand and supply, prices have to correct for demand to pick up. The fact that the prices have not corrected has intrigued me.
In an article titled House of Horrors, part 2, The Economist says bursting of global housing bubble is only halfway through. I searched high and low to see if they had a view on India but couldn’t find any mention. The report states that home prices tumbled by 34% in America from 2006 while in Ireland they plunged 45% from 2007 peaks. Australia, Canada and Sweden though, are seeing prices at new high. In short, the Economist opines that many property markets are still looking uncomfortably overvalued and chances of correction are quite high. The arguments are based on affordability and price-to-rent ratio.
Before I pen my thoughts, let me first admit, I am an interested party. For years I have been planning to buy a house in Mumbai. Unfortunately, my budget is still trying to catch up with the prices. In the past 3-4 years, every time I re-start the process of house hunting aggressively, it takes me just 2-3 weeks to give up and get on with life.
My conversations with real estate brokers have been interesting to say the least. Typically, the ritual starts, on a Sunday morning after breakfast, when I call all the advertisements / brokers listed on the Times Property supplement pages. The standard line of conversation would go like this. Note – actual conversation takes place in local language.
Me: Hello, can I speak to XYZ, I saw your ad today.
Broker: Hello, are you a buyer or broker?
(I don’t know what would have happened if I said Broker with low voice adding Equities. Nowadays you have ads which say Brokers welcome, which might suggest times are changing.)
Broker: Where do you want to buy the house? Size?
Me: 3 or 4 bhk, somewhere in Prabhadevi/ Worli, etc
Broker: What’s your budget?
If you tell the truth, their response would be – With such a budget you will get a house only in Borivali, and then keep the phone down. Every house was the last opportunity before prices just doubled.
At least now, the conversation lingers on longer with the broker reassuring me that real estate prices will not correct but remain high. Interestingly, even the houses which I had a look at around two years ago are yet to be sold. The only difference is that the prices have been marked up by 30 %. Even in the building where I stay on rent, my neighbor’s flat, which is not yet given on rent, has not been sold for the past 6 months.
Look at the math. Rent for a flat is Rs. 1.75 lacs per month, which is Rs. 21 lacs pa. The purchase price of the same flat will be in range of Rs. 5 to 5.4 crores, which gives a rental yield of 3.9-4.2%. Given FD rates of 9%, you can sell the flat, put in FD and stay on rent – if you are a rational economic person, unfortunately most of us are emotional beings when it comes to owning our house.
I have tried very hard to understand why prices are not correcting and these are my findings.
The new BMC Commissioner has not given any approvals; hence, there is no fresh inflow of work in progress/ completed flats. Therefore, prices of ready-to-occupy rule stable or high. Buyers are not keen on under-construction property because of the risks involved - PIL, RTI, etc. Since real estate prices are not quoted on screens (like stock prices), no one knows the extent of discounts on under construction properties.
On the demand side, in the last decade, wages have risen in several sectors, and hence, affordability index has also gone up. Easy access to credit / housing loans added fuel to fire. We are now seeing the beginning of a downturn. If wages stop accelerating or there is a downturn in the job market, it will have a cascading effect on the number of buyers chasing limited inventory of property at high rates. Rising rates are already a dampener. Even those who have bought property and are paying EMIs are feeling the pinch of increasing interest rates.
In my interactions with a number of builders, prices are not correcting as there are no deals on the table. Builders and developers might as well keep rates at Rs. 50,000 and not do a deal rather than reduce the price to Rs. 35,000 and still not do the deal as that would send wrong signals to the market. Secondly, most of the property is pledged with the bank as collateral. If they discount to sell, then entire collateral will get re-priced adding to the woes of the builder. Lastly, most of the developers with debts, have avoided defaults, by borrowing from NBFCs or other sources. This entire cycle of musical chairs might come to an end in the next 3-6 months. If that happens, we will see a correction in property prices. Else, as a technical analyst would say, we will see a time correction with property prices not seeing any more rises.
However, if the game continues, one must chew on John Maynard Keynes’ saying, “Markets can remain irrational longer than you can remain solvent.”