Housing Prices

POSTED BY Ram ON October 16, 2010 11:24 pm COMMENTS (22)

Do you think housing prices in India will fall in the future to more affordable levels? The current levels seem to clearly tell that a common man cannot buy even a simple 2 BHK flat on some outskirts of even 2nd tier cities, leave alone Delhi NCR.

Thanks,

Ram.

22 replies on this article “Housing Prices”

  1. sidrana7 says:

    marshln,

    Say even if the correction of this magnitude was to happen, will the customer be in a position to afford and avail a loan?

    In UK the mortagage rates are the lowest of all time, but if you dont have more than 25 to 40% down payment you wont get the actual low rate. With the 10% or even 20% deposit you would end up 500 basis points away from the todays lowest interest rate advertised.

    Yes prices have corrected, interest rates have dropped. But banks not willign to give me a mortagage with 10% deposit and I do not have 40% down payment either to take advantage of the housing correction.

    How do you reckon?

    1. Ram says:

      Siddharth,

      Actually, whenever such corrections happen it is generally because people are not buying (i.e. demand is less than supply). This is generally because RBI has sucked out liquidity by raising interest rates. So interest rates are often very high when these corrections happen (both in housing prices and stock markets also).

      At higher interest rates, new loan applicants are lesser in number as they will just put off the buying decision for later. In such times, lending banks would actually be more willing to sanction home loans if you think of it because that is their business at the end of the day. How will the make money with such few “customers” (loan applicants)?

      I’m not saying they will issue a loan to anyone and everyone. I’m only saying that such a time is a much better time for them to issue a loan.

      Ram

      1. sidrana7 says:

        Ram,
        see, when the rates increase as you have correctly mentioned loan applications usually dry out. And banks like to see this to make profits.

        Now the new loan applications are not the one’s which make hefty sums for banks but the already existing customers whose interest rate has tarcked the rise. They will contribute higher interest components.

        Forget about banks making money, they make anyhow, either gloom or doom.In gloom they sucker common mans cash directly and in doom the same common man’s cash indirectly via governments bail outs.

        If I were you I will worry abotu myself only. Note that with higher interest rate and with corrected property prices the length of loan tenure may equate (not precisely) to the one taken when lower rates with high property price.

        Again bucket of salt needed here.
        πŸ™‚
        cheers
        Siddharth.

  2. marshaln says:

    i somewhat agree with sidrana7, 40% correction is unlikely to happen.
    if you see past 1990-2000.. prices were standstill…

    1. Ram says:

      Marshal,

      Yes, 1990-2000 was the time when housing prices were rising in a fair manner. It is only after 2000 that things have just bubbled up.

      Ram

    2. sidrana7 says:

      Ram,

      I do appreciate your reply here.

      I reckon Deepak Shenoy and Manish Chauhan ahve written excellent blog articles on housing matters. I find it very useful.

      Comparing stock market and Real estate isnt fair, in my naive opinion. Even though one can say both are investment instruments, I dont think you are buying home to trade as you would an equity stock on the exchange?

      There is a surge of investment money going into real estate and hence it has seen exploded. Even if you buy home at todays price and see a correction and bypass it to the completion of your loan tenure and still you will have left with positive equity in your home.

      The case will be how much of positive equity will be there in your property say after 30 years? Depends on what price you buy what interest you pay on loan. Again as it is said unless the profit is booked it is not called profit and hence only positive equity.

      I am not counter arguing your valid point of affordable prices. Same time I dont think there will be fairness any soon or say in near future.

      But this is uncertain thing and is it worth waiting that long?

      Important thing is to get on the property ladder, once on somewhere on can move ahead with time and added equity.

      Theres point in waiting as well. You can save some amount of down payment and invest in high ROI instruments, waiting for property prices correction. Also there are always some buts. If the correction in significant magnitude doesnt happen then?

      Even though prices are unaffordable, interest rates are lower and banks are happily lending without much restriction (in India). Remember the financial scrutiny rules will only get tightened progressively.

      regards

  3. sidrana7 says:

    Ram,

    If BRIC and in specific India Growth story is in fact true and continuing over next years then expectation of housing price correction of 30% to 40% is mere daydream, unless some natural calamity or manmade war happens. Which god forbid should not happen because we all will be at loss.

    The story of housing prices doubling in last 5 years is same everywhere and I am also in same boat like yours.
    The more wait is not going to help at all. At some point one has to make decision and wait and watch over the years to judge the decision.

    Like term insurance age is not stopping for your affordable premium same goes here in real estate. If you like to see housing correction of 40%, remember it will have to affect economy growth and your job also.

    Expecting such a huge correction without the collateral damage is not goign to happen. Imagine if at all the correction happens, will you be in position to afford the inflated expenses and will the bank be willign to offer bank loan at that worse time in industry?

    My two cents, although not helpful but purely my view.
    best regards
    Siddharth.

    1. Ram says:

      Siddharth,

      Thanks for a fresh perspective. You mention that if everything remains fine (i.e. jobs, growth, GDP, etc.) that the housing prices should not correct. Let’s not consider 30% or 40% or any % right now. Speaking only about a correction, by that logic even stock markets should never correct. But they have always corrected (and very deeply every single time). Regarding collateral damage, even if you think of the stock markets, it is not always necessary that any collateral damage occurs. If you think my comparison of housing market to stock markets is wrong, then please explain why.

      Regarding western economies like US, UK, and Europe, there have been serious issues with the way the banking system has functioned in these economies. That’s why you see entire countries sinking under debt and even the very real risk of defaulting. Greece, Italy, Spain, Portugal are prime examples. So, if you are to consider the lending structure in these countries you have to consider the tremendous pressure and health issues the banking industry is facing in these countries too.

      I personally don’t know if there will be a 30-40% correction in prices here. As a common man I can only hope that it happens so that a dream of having a home can be fulfilled. It might be emotional to want a home that is your own but then by that argument you don’t need a car when a scooter can perform the same function. Yes, I do know that the current prices are definitely out of the reach of the common man. I’m not ready to accept that people who are earning Rs. 6-8 lakh per annum in IT companies, BPOs, etc. have these prices within reach. If you bring out the loan argument then you have to remember that the loan is dependent on the job. So you can’t say that these 35-40 lakh prices are within the reach of someone who earns 6-8 lakh per annum. You can only say it is within reach if you have at least 75% of the total price in savings.

      Regards,
      Ram.

    2. Ram says:

      Siddharth, I forgot to tell that your views are very helpful. I think anyone who can participate and contribute to this discussion in any way based on what they think is definitely helpful.

      Thanks.

  4. marshaln says:

    check out today’s article in times of india on same issue
    http://goo.gl/OK4C

  5. rakesh says:

    As long there is demand from buyers builders will keep the prices up especially in Mumbai.
    Central Suburbs is developing very fast with sick companies selling the plots to the builders.
    I had sold a 1BHK flat in Mulund 5 years back for 15 lakhs and just recently the same flat was sold for 55 lakhs and guess what there were buyers lined up. Its actually the location that counts. People prefer schools, temples, markets, shopping malls.
    Doesn’t look like property prices falling down in the near future especially with Dassera and Diwali, lot of buyers will queue up to buy properties.

    Rakesh

    1. Ram says:

      Rakesh,

      While there is still an argument for Mumbai prices, there is no argument for the prices in the rest of India. Even 2nd tier cities are so expensive in housing prices. As Manish pointed out, it is like a mafia now and as Marshal said that there are no real buyers…just people wanting to make a quick margin by trading.

      Your thoughts?

  6. marshaln says:

    well everyone is hoping that real estate prices will crash.. but don’t know when!
    yesterday i had gone to vasant oasis(very close to my place) a project by sheth developers and you won’t believe on launch day one tower is completely sold out.
    starting price for 2bhk flat is 1.25cr..(9700/- p.s.f)
    investors are playing big time..one investor is selling to another with hope of making extra profits(7-10%) within a interval of 6months..is sign of bubble formation..real buyers are missing for market..
    if it crashes then correction would be range of (20-30%) depending upon location and city. that is what i have noticed in 2008-09

    1. Ram says:

      Marshal,

      Let’s hope that there is a correction. Its really sad that these investors and builders have converted the housing market into a trading platform. Real buyers who are looking for a “home” and not a “house” are at a real loss.

      Regards,
      Ram.

  7. Ram

    Truely speaking , the correction will happen , but still it wont be so much and so prolonged one that common man can take advantage, there are many buyers who are of same view that correction will happen and they might be waiting for that time , so when it happens (may be 30-40%) , every one will jump in and make sure that the whole drop in prices was for very less time (1 yr may be or 2 yrs) . It would be a good time for buying considering 4-5 yrs in view and not very long term .

    What do you say Ram ? or what others think ?

    Manish

    1. Ram says:

      My thoughts must be already clear to you that at the current price a common man like me cannot buy. There is no question about that. Loan I will take only when I know that I can repay the entire amount and currently there is no question of being able to repay such amounts. I am not stupid to think that the amount I take on loan is free money or even that I won’t have to repay it.

      If you say there might be a 30-40% correction, it should mean that the flats which are right now around 35-40 lakhs should be available for 24.5-28 lakhs (in case of 30% correction) and 21-24 lakhs (in case of 40% correction). In case of a 40% correction I might go for a loan and buy with all my savings. The thing is that we always try to save money for that dream home and that dream home keeps running away from us. It’s a sad thing that something so basic like a home is not within the reach of the common man.

      Regarding valuations, my belief is that if a rental yield stands at 2-4% today (i.e. per year rental income one can make from giving on rent as a percentage of the house value) then this valuation is totally absurd. Infact it makes me think how we came to these levels in the first place. With 40% correction the rental yield will become around 7.5% which is still on the lower side. It should be at least 10% in my opinion. What do you think on this, Manish?

      Maybe builders don’t get the idea that creating affordable housing for people can help them make money much faster because it will create a much larger demand. You can still make a lot of money in that manner also because the demand will be very high. This affordable housing concept looks like some new invention that no builder has thought of in their pursuit of greed. Doesn’t it look like that? Maybe some person with sense might make a start and things could change.

      I just hope that we don’t head on the same path as the US housing market. Today many people take loans on the basis of their jobs. Hope that nothing happens to the jobs in India otherwise we would face the same thing that the US market has faced. People will be still able to repay their loans in India because we save money and the banks will not give you a loan until they feel at least 80% sure that the person will be able to repay with savings. But sadly the savings of Indians will be wiped out in that case.

      Please share your thoughts and let us discuss this topic because I think this is something that affects everyone today. Your thoughts, Manish?

      1. Yes

        I agree with your views , housing is one such thing which is now in control of mafia and its more of a tool to make large sum of money rather than providing affordable housing to common man ..

        Rental yields have always been in such a range like 3-4% , and 6-7% for commercial real estate , expecting 10% from residential houses is not a good idea , it has never happened nor its expected . Given these points only and removing the emotional part , it makes sense to live on rent , but common man does not think like that .

        Manish

        1. Ram says:

          Manish,

          Thanks for correcting me on the rental yield. Maybe I’m expecting too much. I read about average rental yields in many countries and the general consensus was that between 8-12% is a good figure if you want to say safely that the valuation of the housing is fairly valued.

          Regarding living on rent, I agree it is an emotional thing to want your own home. But don’t you think it’s also a matter of convenience? For example, no hassle of changing home whenever the landlord wants to increase rent beyond a logical amount. Additional charges and mental stress is involved with moving also. And if the home is located in a place where you want to retire, then there is even more reason to own it because in the later life you don’t want such hassles.

          By the way, do you plan on owning a home or no?

          Also, do you think we could head on the same path as the US housing market? As I said, we Indians might be able to repay with our savings and so there will be much lesser foreclosures, but it could wipe out our savings.

          Thanks,
          Ram.

    2. Ram says:

      Manish,

      For some reason, 3 of my replies that I posted just yesterday or day before yesterday are not seen anymore in this thread.

      Could you please check?

      Thanks,
      Ram.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Download Our FREE Ebook!

Available only for first 100 people today

Download Our FREE Ebook!

Available only for first 100 people today