Is the Indian Real Estate Market Still Booming or Has the Bubble Burst Already?

The Indian Real Estate Market has been the preferred choice of investment for many many years and in fact, if you dont own a home, you are looked at as someone who isnt successful in his/her career or life. The first thing parents expect their son or daughter to do after they land a job (of course - second in the pecking order after marriage) is to buy a home. This healthy influx of potential new home buyers has kept the Indian Real Estate Market in a "Boom" phase for a very long time. 

I had posted an article last November titled The Current State of Real Estate Market in India. 

This article is a continuation of that. The purpose of this article is to check whether the Real Estate Market in India is still Booming or whether the Bubble has burst already. I would recommend you read the earlier article to gain insights on what my opinions were at that time to make more sense of what am about to say here... 

The Key Indicator - Demand for Residential Homes 

One of the Key Statistical Indicators of how well the Real Estate Market is doing is the "Demand for New Homes" parameter. If we check the market statistics for the financial year 2014-15 you would see that the demand is down 21%.  

If you check the last years article you would notice that the same parameter was down by over 20% for the financial year 2013-14. This effectively means that the demand for residential homes has been coming down by 20% or more for the past two consecutive financial years.... 

Another Good Indicator - Launch of New Projects 

Another Statistical Indicator that can tell us how well the Real Estate Market is doing is the "Number of New Projects" that are being launched in major cities/towns across India. The Data for the period 2014-15 financial year shows that the No. of new projects launched is down by over 35% as compared to the previous fiscal year. 

So, Why is the Demand Low and the No. of New Projects being launched going down?

There are many reasons for this:

1. Over Supply 

Everyone would agree that there are more homes out there to buy these days than folks who are willing to buy them. Just like any other industry, when there is surplus supply demand is bound to go down..

2. Price & Affordability

Everyone would agree again that property prices are still very high across the country and haven't really come down. Though the demand for houses have come down the prices of homes haven't come down by much. In fact, year on year the prices are not down by more than 5% whereas the demand is down by over 20%. 

Whenever the demand for a certain product comes down, the manufacturers usually offer discounts and cut prices to boost the demand. The Real Estate Market on the other hand hasn't done that much because of the huge volume of black funds that have been channeled into real estate projects. When someone is bringing in unaccounted funds into a project and trying to turn black to white, they would not mind waiting a few extra months for their funds to become white...

Unless the prices come down more, homes would still be termed as unaffordable by most of the middle class population of our country. 

3. Delayed Delivery 

One of the main reasons why new large projects are not being started is that the "Consumer" has woken up. Up until last year, large real estate promoters took their time in handing over their projects to their customers and did not really bother much about it. 

Statistics show that - of the large residential projects launched between 2008 and 2013 almost 50% were delayed by around One year and almost 20% have been delayed for over 2 years or more. 

Thankfully the National Consumer Disputes Redressal Commission (NCDRC) has actually forced Unitech one of India's largest real estate promoters to compensate home buyers whose projects were delayed. The company was willing to compensate their customers by 1.8% while NCDRC instructed that the compensation must be 12% per year for the delays and any further delays must be compensated @ 18%. 

With this revolutionary verdict, troubled home buyers whose builders have taken them for a ride are actually consulting legal opinion to get compensation. On the contrary builders are now thinking of ways to make sure they finish their projects on time to avoid paying compensation to their customers... 

An interesting point to note here is that, one of the main reasons for delayed delivery is actually the reduction in the launch of new projects. Real Estate developers usually spend the funds they collect from the launch of their current project to pay off earlier debt and use the funds from their next project to finish their current launch. All this works extremely fine as long as they have new projects launched in regular intervals. When they cannot launch a new project, they most likely may not have enough funds to finish their current projects and the backlog of pending projects just keeps increasing...

What to Expect From the Real Estate Market - In the Coming Months 

I Strongly feel that the Indian Real Estate Bubble has burst already. With the reduced demand, lack of new projects and the lakhs of already completed homes that havent found buyers yet, the market is braced for tough times. 

In the coming months, you can expect the following:

• Property Prices will start going down 
• More and More home buyers whose projects are delayed will start suing the big promoters
• New Project Launches will slow down even more 
• Stock Prices of Real Estate firms will either stay flat or go down

The coming few months are going to be very tough for the Indian Real Estate Market. I will put up another review of the state of the Indian market after another 4-5 months.

Some Last Words:

If you are a first time home buyer, dont let this negativity bog you down. Look for a reputable builder and try to negotiate a discount. With the demand for homes at an all time low, chances are that you may end up with a pretty good deal. You should not wait for prices to go down to purchase your first home. 

If you are a second/third/investment home buyer - wait for the market to recover. There is a very good chance that the prices will go down and if you want, you could wait for the same. 

Hope you found this article useful.. Do share the same with your friends... 

Bad News for Home Buyers - Home Loans to get Costly in 2012

Yes, you read the title of the post right. "Home Loans are set to get Costly in 2012". As soon as you read it, you may be tempted to think that the Interest Rates are probably going up and that is why am saying so. Unfortunately my friend, Interest Rates have nothing to do with this. The Reserve Bank of India has issued a new guideline to all Banks that grant Home Loans. This article is about that.

What is the new Guideline?

Reserve Bank of India has asked banks to Exclude Stamp Duty, Registration Fee and other levies from the total cost of the home, while calculating the loan disbursement amount.

How does this affect us?

Registration fees, Stamp Duty, Taxes etc. that are part of the total property being purchased were considered while calculating the home loan amount. Going forward, these fees & taxes have to be borne by the home buyer and will not be considered in the home loan amount.

What are the Various Fee's we pay while Buying a Home?

Stamp duty and other levies vary from state to state. In Maharashtra, for example, stamp duty is 5%, while in Chennai & Bangalore it is 8%, Kolkata 7%, New Delhi 4% and so on. The VAT is 1% across the country and service tax is around 3% (varies from state to state)

Overall this works out to nearly 9-10% of the actual cost of property depending on which state/city you intend on buying your house.

A Real-Life Example:

Before you begin wondering how much this will affect you, let’s take a look at a simple calculation. Let’s say Mr. Ramesh wants to buy a house in Chennai. Below is the Total cost quotation as provided by the builder:

Total Area	Cost Per Sq. Feet	Undivided Share of Land	Cost of Property	Registration Fee & Stamp Duty	Car Park	EB & Water Supply Deposits	VAT	Service Tax
1200 Sq. Ft	Rs. 3000/-	600 Sq. Ft	Rs. 36,00,000/-	Rs. 2,88,000/-	Rs. 2,00,000/-	Rs. 50,000/-	Rs. 36,000/-	Rs. 1,08,000/-

Note: This is just an example for illustration purposes only. The actual quotation you may receive from your builder may vary based on his specifications...

As you can see, the total cost of the house that Mr. Ramesh has to pay in order to buy the Apartment is Rs. 42,82,000/- (Rs. 42.82 lakhs)

Existing Home Loan Calculation:

Total Property Value: Rs. 42,82,000/-
Loan Amount that can be disbursed by the bank (@80%) = Rs. 34,25,600/-
Amount Mr. Ramesh has to come up from his pocket: Rs. 8,56,400/-

New Home Loan Calculation:

Total Property Value (Excluding Fees & Taxes): Rs. 38,50,000/-
Loan Amount that can be disbursed by the bank (@80%): 30,80,000/-
Amount Mr. Ramesh has to come up from his pocket: Rs. 12,02,000/-

As you can see Mr. Ramesh's initial payment amount has nearly become 1.5 times:
Banks will ignore the Service Tax of Rs. 1.08 lakhs, VAT of Rs. 36,000/- and the Registration fee of Rs. 2.88 lakhs. This works out to Rs. 4,32,000/-

Whoa!!! Hold On, Don’t Banks grant up to 85% of the Property Value?

Are you someone, who hit the brakes and thought of this? Did you?

Well my friend, unfortunately this isn’t true. In Dec 2010, in order to check excessive lending by banks, RBI had directed commercial banks against lending more than 80 per cent of the value of a property for loans above Rs 20 lakh and not more than 90 per cent for loans below Rs 20 lakh.

How does this affect Banks & Real-Estate Developers?

Paying up more Initial Money means, people will be hesitant to go for buying homes. If I have to come up with nearly 12 lakhs to buy a property that is worth nearly 40 lakhs, that’s a lot of money. I might need years to save up that kind of money in order to buy my house and go knows, how much property prices will go up by the time I finish saving up 12 lakhs. In all probabilities by the time I save up 12 lakhs (let’s say optimistically I can save it in 3 years) the cost of that property would have gone up to around 50 lakhs and I will still be short by 3-4 lakhs.

In the short term, this decision will put an additional strain and burden on the home buyer.

So, The number of people buying new homes can be expected to drop and The number of people going for Home Loans can be expected to drop.

All in All, the Real Estate Market may face a slowdown due to this move.

Why Exactly did RBI come up with this Ruling?

Experts believe the RBI's latest move is aimed at curbing speculation in the property market. RBI feels that, including all the fees and levies in the value of the property is actually overstating what the house is worth in reality. From a Banks perspective, below is how they may justify this new ruling...

Let’s say, Mr. Ramesh takes a home loan for his house and gets the 34.25 lakhs (including all taxes & fees) disbursed and declares bankruptcy after 1 year. The bank may not be able to recover its full loan outstanding amount. If you ask me why, which I am sure you will, below is how:

1. In the initial years of home loan repayment, Interest works out to almost all of the EMI amount. So, by the end of 1 year, Mr. Ramesh would have probably repaid Rs. 50,000/- in principle amount.
2. Cost of re-sale property isn’t usually as much as a new property. Depreciation will be considered, even if the house is only a few months old. Even if we assume property prices may have gone up in the 1 year period, the amount may not be drastically more than what it was 1 year ago. So, a property that is worth 36 lakhs if new will be worth only around 30 odd lakhs or lesser for resale
2. Cost of VAT, Stamp Duty, Taxes etc. cannot be claimed from the re-sale home buyer. It is not his problem as to how much taxes and fees were paid when the previous home owner bought the house.

All in All, the bank stands to lose a lot of money if Mr. Ramesh goes bust and fails to repay his loan.

Is there any Good Side to this "Anti-Housing" Ruling?

Every coin has two sides. This ruling, which may be perceived as an "Anti-Housing" Ruling too has its benefits. They are:
1. Property prices may stabilize. Making up more initial payments means, lower demand and hence lower hikes in property prices. In all probabilities, property prices won’t double as it has done over the past decade or so (Multiple times I must say). The cost per sq. feet in Chromepet area of Chennai around 15 years back was around Rs. 500 to 600 per sq. feet. Now it is Rs. 4000 or more. Literally it has gone up 7-8 times over the past decade and a half.
2. Lower home loan amount means lower EMI's and you can repay your loans even quickly

I would say, the first benefit is by far the best justification. Though I am not an ardent supporter of this ruling (I too have to come up with that extra money when it’s time for me to buy a home) in the long run, this will help curb the steep rise in property prices across India.

Let’s hope property prices don’t shoot up through the sky like it has over the past decade.

Before we wrap up, below are two articles that you may find useful in your quest for buying a new home:
1. Buying a Home
2. Documents Required for an NRI to buy a home
Happy Home buying!!!