India Real Estate. Entering crash zone?

Have you read this interesting article in First Post? It says that real estate prices are about to crash across India.

I have been maintaining for some time that Real Estate Prices are very high in India and are due for a correction sooner or later. It looks to me that this correction is sooner rather than later.

Consider this. There are less than 30 Lakh people in India who has a taxable income more than Rupees 10 Lakhs per year. On the other hand, an average 2 BHK room in the outskirts of Mumbai costs over 1.25 Crores. Who can afford this? 

Answer? Speculators. Those with black money. DINKS and DIOKS (may be).

An average middle class person cannot afford this price. So what do they do? They stay in rented apartments. It works out cheaper. As per this article, the rental yield is about 3% which is much lower than a Bank FD. Which effectively means that it is much more lucrative to stay in rented apartment than buy a house.

Check out my article about Kambles in this blog to understand the details.

Signs of an impending correction is all around us. 10-10-80 Schemes, 20-80 Schemes, Developer paying Pre-EMI interest, pay  10% down and nothing till possession, Online sales of houses, Real Estate fairs offering huge discounts, seller paying the stamp duty, home augmentation offers (free furnishing, free modular kitchen etc) and even a 'Get one room free' offer (remember seeing this somewhere)....

Real estate inventory with the builders are piling up. It is currently about 77000 in Mumbai, which will take 30 months to clear !!.

Following are the seven reasons why I think that the real estate prices in India are about to correct.

1. Investor Expectations: News and signs of impending correction are all around us. The article in First Post is the latest sign that the prices are about to fall. As the expectations about a fall increase, investors will delay their purchases. This have a domino effect and will lead to further fall in real estate prices.

2. Working capital pressure: Builders normally manage the working capital requirements by rolling over the cash flow from apartment sales. As the sales of new homes fall, the builders will be under working capital pressure. Since other avenues of availing working capital are drying out, they, especially the small builders, will enter into a 'desperate sales' zone and lower their prices and sell the apartments at a loss. This in turn will add to pressure on the big builders to lower their prices.

3. Tightening of Bank Lending norms to Real Estate Sector: Earlier, banks could lend a significant percentage of their capital to the real estate sector. Two years ago, it reached an alarming rate of about 52% across the banking sector, while the norm is less than 10-15%. Seeing the risk to the banking sector, RBI intervened and tightened the norms and the oversight leading to banks cutting down on their lending to real estate sector. This in turn is putting pressure on the Working Capital situation of the sector as mentioned in point 2 above.

4. Strong black money legislation: The latest black money legislation introduced by the BJP government aims to crack down on the black money in this country. Traditionally black money was a major driver for escalating real estate prices in our country. Focus by government on black money has led to that moving out of the sector. This in turn is adding pressure on the working capital situation of the sector. 

5. Global economy is down: Many of the new home buyers are IT professionals. As we know, Europe is in recession, China market is tanking and globally economy is down except in the US. IT sector is expected to create 15% less jobs this year according to NASSCOM. IT companies may not pay the kind of salary hikes which are the historical norm and also there is a lot of focus on cost cutting in IT companies. The recent earnings downgrade of KPIT and Tech Mahindra portent not so rosy scenario for IT sector. So the Indian investors are becoming cautious and keeping their money in cash rather than investing in real estate.

6. Investible surplus moving to stock market: Currently Indian stock market is one of the few in the world, along with Japan, US and may be Iran going forward, that is doing well. It is expected to do even better in the coming years. Many investors are selling their real estate and investing the same in stock market with the eye on better returns. And this adds to pressure on real estate prices. 

7. Finally, Increasing real estate inventory: This will keep the prices down for some time till they get cleared. 

So my suggestion to those who want to buy an apartment. Wait. For all you know, you might end up with a villa for the same price.