The Reality Of Real Estate Markets In India   Jan 27, 2016

China has been a hot topic of discussion everywhere these days---it’s been slowing down. Factory production and exports are shrinking and robots have started displacing factory workers. The Chinese Government is leaving no stone unturned to stave off the downslide further.

But this isn’t the end of their problems, there’s more trouble in China’s housing market. It is in dire straits and shows no signs of revival. Millions of homes are unoccupied. As per the data published by the National Bureau of Statistics in May 2015, the total area that remains unsold in Chinese cities sums up to 657 square kilometers. Do you know how big that is? This expansive area could accommodate another Singapore.

You’re probably thinking, what about India?

Given the sub-culture where peeping in other people’s homes and gossiping might be very entertaining, however ignoring what happens in your own home is often disastrous. Though India’s housing market may not be in dire states as it is in China, one can’t dismiss the possibility of a bubble forming. There’re already some clouds on the horizons in the Indian real estate market.

Wake up Indians… You shouldn’t buy homes blindly

As per the Financial Express dated January 25, 2016; the total value of unsold residential properties in India’s top 7 cities stands at whopping Rs 4 lakh crore. There’s a little over 7.5 lakh houses unsold. It is expected to take another 3-5 years to clear up this inventory.

Mumbai, Delhi and NCR, Kolkata, Chennai, Pune, Bengaluru, and Hyderabad are the 7 cities that have been witnessing the slowdown in the new home buying activity. Despite fewer new launches, the property inventory hasn’t gone down significantly over the last one year. For example, a residential property (2BHK) in Mumbai that costs about Rs 3 crore in 2014 saw a decline of just 2%-3% in 2015. Properties priced slightly lower (say between Rs 40 Lakh to Rs 1 crore) have no buyers either.

Developers have been sitting tight on the inventory but they are unnerved. They are trying to solicit customers by offering discounts and giving away ‘assured gifts’ to new buyers. Nonetheless, they have managed to keep the housing prices very high. Many of them are heavily indebted and may find it difficult to run the show, but they can’t afford to slash prices aggressively, or else, they will have to settle for lower realizations for a protracted time period.

What are the reasons for low occupancy?

Unaffordability is the single most responsible factor. Besides, the quality of city infrastructure and sombre economic growth are the other major factors that have negatively affected the real estate demand in top cities. Bribery, corruption, and under the table deals are the real culprits though.

Price-income ratio tells you how affordable the property is. Basically, the ratio focuses on measuring the property prices in the given market with respect to the median annual household income. For example, a ratio of 6 means, property prices are 6 times the median annual household income. On this parameter, properties in India are more expensive compared to the World’s finest cities such as San Francisco, Paris, and London.

Ironically, India’s median household income is one of the lowest among major economies. Applying the other measure, i.e. home loan EMI to monthly income ratio, prices in India are way up there.

What to expect?

PersonalFN believes, if you are still in a search of your first home, you should bother more about affordability and avoid speculating on property prices. Poor city infrastructure may affect your quality of life. Travelling to office and back home might be challenging; yet affordability remains the most important aspect for homebuyers. If you overstretch and purchase a home in a plush locality where prices are unaffordable; you run two risks. One, the value of your asset (home) may not grow much if it’s already in a bubble zone. Two, you would have to commit to paying higher EMI for next 15-20 years.

Unlike stock markets, the real estate markets move slowly but they are no less violent. Real estate in India is a like a bubble about to burst. No one knows when the countdown will begin and if you still don’t find property prices irrationally high, the conclusion might change your mind.

The total value of unsold properties in top 7 cities is almost equal to the total value of the entire Pharmaceutical and the food industry in India put together. As far as affordability goes, properties in San Francisco (On of the expensive real estate markets in the U.S.) may be priced 10 times the median household income. Try applying this to prices of properties in India.

Such problems may not spur your sensibilities, but keep your eyes wide open when investing in property.

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