Intro: Real
Estate has been the most desired asset of poor’s and the dearest asset of
wealthy. There were several reasons for its spectacular performance as an asset
class, like opening of Indian economy two decades ago took out many from below
the poverty lines, newly created jobs provided a descent income for the
educated class, towns got bigger, consumption patterns and lifestyle changed,
aspirations only got bigger. That was the period during 2000 to 2008.
a. Healthier growth (2000 to 2008): Economic
growth of the last decade led to a steep rise in demand for housing, and land requirement for infra
projects. Real estate prices soared overnight but the valuations were
justified. There were lenders lined up for all these projects which were
expected to produce superior returns. Real Estate, construction and
infrastructure industry created the new billionaires. (But many are off the
list already). There were real estate brokers on every street helping the buyers and sellers conclude deals in a hurry. Govt.
registrar offices got a new lease of life with ever increasing transactions.
Banks thrived. Any new housing project would be sold off in a few hours. All rich and
poor thought they would miss the bus if they did not do something in this
space.
b. Liquidity & fight against inflation (2008-2012): Along with growth, inflation too made its mark. Crisis in 2008 after the fallout of Lehman and the subsequent impact to housing sector in US led to a slow down in global growth rates affecting India’s own growth story. Many other financial issues suppressed until then began to surface. A term ‘PIIGS’ started doing rounds on the newspapers and TV channels. Central banks, Fed and ECB, took the route of easy monetary policy attempting to revive growth or at least avoid the possibility of a break down in the financial system. This led to a stubborn inflation during the times of a slowing growth. Gold and Real Estate became instruments to lock the wealth for those who prospered and who were already rich. A portion of the easy money flowed into commodities and also to emerging countries. This higher liquidity helped to maintain the real estate prices high.
b. Liquidity & fight against inflation (2008-2012): Along with growth, inflation too made its mark. Crisis in 2008 after the fallout of Lehman and the subsequent impact to housing sector in US led to a slow down in global growth rates affecting India’s own growth story. Many other financial issues suppressed until then began to surface. A term ‘PIIGS’ started doing rounds on the newspapers and TV channels. Central banks, Fed and ECB, took the route of easy monetary policy attempting to revive growth or at least avoid the possibility of a break down in the financial system. This led to a stubborn inflation during the times of a slowing growth. Gold and Real Estate became instruments to lock the wealth for those who prospered and who were already rich. A portion of the easy money flowed into commodities and also to emerging countries. This higher liquidity helped to maintain the real estate prices high.
Forming a top:
So what changed by the end of 2013? It is the reducing optimism
and the belief in India’s growth story. 5% growth rate had become the new norm.
Banks had to lick their wounds inflicted by Infra sector in the form of
non-performing assets. US Fed announced tapering of QE3. Credit growth became
tight with the measures taken by RBI. And the appetite in the house buyers
reduced significantly. Small builders who could not hold on had to sell to
bigger developers. This made the real estate prices stop from reaching new
highs or at least it appeared so. Gold, another asset we are looking in tandem appears to
be in correction zone.
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| Reducing new loans. Source: HDFC Sep'13 Quarterly results. |
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| Declining sales trend at Unitech. Source: Unitech Q2'13-14 results |
No and cannot be. The fall in Rupee had made the property in
India cheaper by 20% for the Non-resident Indians. Those NRIs who earlier
thought they missed the bus had an opportunity to board it again. And there
were many new projects being launched to cater to this market segment.
What are the warning signals for the sector?
i.
RBI in its latest 'Financial Stability Report’
warned that, in the event of a credit risk due to failure of a major corporate,
banks would fall out and the contagion would spread leading to a major collapse
in the financial system. It identifies infra and construction sectors as being
most risky and public sector banks being more vulnerable to this. If Govt. rescues
these public sector banks it owns partially, it would avoid the collapse of but
profitability of these banks would be gone. While this may or may not happen, this
would limit the funds flowing into the reality and infra sector.
ii.
Liquidity would reduce as Fed increases the pace
of its QE3 program. This would mean the end of easy and cheap money and markets will witness those funds
leaving India back to their home country. This would make the cash king again
at the expense of gold and real estate prices.
iii.
Drop in demand to due to slower economic expansion,
fewer jobs being created than earlier decade, salaries not rising like in the
last decade will impact the demand. A slump in new car market during last year proves
that purchasing power of consumers has taken a hit.
iv.
Many (well most) real estate companies are
running in losses, their stock prices are trading at multi-year lows and they
are struggling to raise funds for their new projects. They may not be in a
position to hold on the rising inventory for long if demand does not come back.
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| An analysis by Liases Foras shows correction is due. Source: Liases Foras company website |
Conclusion:
While it is difficult to say whether there will
be a correction or not, which depends on how long the co-operation or nexus of banks
and developers last, one can be sure that this industry is in troubled times. If it
is a bubble already, it may not get any bigger this year.
Real estate is definitely in trouble but the old faithfuls are in state of denial. I spoke to few of them and they said it has already corrected (ie the correction of 25% from the peak) but they balk at the idea that this is not at all a correction given the fact that it appreciated to the tune of 500% in a span of few years. For them, prices going back to same levels is just an impossible thought. Well they may be true in the sense that post all the growth a new normal is created in this sector.
ReplyDeleteBut my contention is that a major correction is yet to come and once it happens, people will not have a clue of how to manage it.
Regards,
va_av
Doc, while I am not sure if there will be correction or not, but the earlier seen growth rates are gone. The new investors with 3-5 years investment horizon need to be cautious is my view.
ReplyDeleteAt its peak during 1980-90, Japan accounted for 40% of all the property value on the planet, but the price of real estate slowly declined at 6-7% annual rate for two decades, ultimately falling by a total about 80%.
ReplyDeleteRef: Andy Xie's views expressed in 'Breakout Nations' book
I remember my mentor in financial markets, UPPAIMAPPLA from moneycontrol dot com., If affordability is the scale, than a house should not cost more that 30 times of annual salary. Then it is matter of time to decide, how our economy(inturn take home or gross salary) would grow.
ReplyDeleteThe real estate prices in the last few years are disconnected from the demand growth. A reason for that could be black money flowing into this sector. It appears like the money made during the last decade through illegal means found way into real estate (corruption was highest during that period). But the situation is changing. Businesses which feed corruption like mining, infra, coal are not doing and resulting in bad loans. With the reduction/absence of black money flow, real estate prices are at pause now. Retail demand slowing down due to un-affordability is adding to injury.
DeleteI am collecting data, facts on the lost decade of Japan driving down the real estate prices in major towns there despite Japan having a limited land and an expanding monetary base. All over the world land prices have risen a bit higher than inflation rate but any spike/deviation from that curve has led to correction thereafter bringing the prices back to inflation growth rates.
i erred in my previous reply,, one of the measure of arriving at property prices with respect to income levels, is that the property prices should not be more than 30 to 40 times of the annual rent in that area. Given this backdrop, the recent volatality along with vaccant houses non occupied even for a decent rent , shows there is high level of sticky wicket on both sides. Tenants unwilling for higher rent(owing to their income level) and house owners unwilling for settling down to normal rents(owing to abnormal prices he paid for the house). But, politics could manipulate until the neck of the burst, like what is done now at GM crops.
DeleteBBS ji, it is not only rents, entire economic scenario including real income growth, CPI, bad loans in system, unemployment rate etc. seems to have an influence in the land prices. I posted relevant charts in the blog today. Please take a look and give your comments.
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