Residential & Commercial real estate - Time to burst?
Jayanth Varma @ Financial Express: Bubble in our backyard
Indians have been buying expensive houses almost completely financed by banks. The cumulative loan to value ratio including “furniture loans” and other forms of financing has been close to (and has sometimes exceeded) 100%. Unlike in the past, many of these transactions have been largely free of black money and therefore there is no hidden cushion in the loan to value ratio. Moreover, our young upwardly mobile professionals have been taking on large mortgage payments (EMIs) assuming that these would be affordable on the basis of projected salaries one or two years down the line.
I’m not sure about the ‘largely free’ part, but the ratio’s certainly gone down.
Real estate prices are sticky and they fall only gradually. Hidden discounts are more common than public price cuts. Evidence from the stock prices of real estate companies indicates that the value of their land bank has fallen by over 50%.
Sticky? Very much so. You can’t deny a lower stock price, but you can be in denial about the market-clearing price of your home for a long time.
We have anecdotal evidence that the retail unsecured lending portfolio of some large finance companies (including some foreign owned ones) received exit valuations of as little as 30% of face value early this year, and are probably worth even less currently.
Yowza. And we all know how the market has voted on the Great Indian Real Estate Boom; here’s a summary of the BSE Realty Index:
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Previous Close
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Week Ago
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Month Ago
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Year Ago
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| Value | Points | % | Value | Points | % | Value | Points | % | Value | Points | % | |||||||||||||||||||||
| 2,804 | -129 | -4.61 | 2,844 | -169 | -5.94 | 4,334 | -1,659 | -38.28 | 10,076 | -7,401 | -73.45 | |||||||||||||||||||||
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It’s near its 52-week and all time low. It’s down over 80% from the peak.
As I said, liquid & transparent markets discount things sooner. The real estate market in India is neither liquid not transparent. It’ll take quite a while for prices to correct to saner levels.
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