Will owning a house remain a lifelong dream?

Oct 24, 2011

In this issue:
» Precious metals to get more precious thanks to the crisis
» Will RBI continue its hawkish stance?
» Disinvestment blues continue to haunt the govt.
» US rating to be downgraded again
» ...and more!

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A dream for most Indians is to own a house. It is something that we start dreaming of the moment we get our first job. We save to be able to make this dream a reality one day. But if you belong to the middle-income group and are living in Mumbai then this dream may never come true.

Property prices in Mumbai have been soaring upwards. Owning a property in the heart of the city is a feat equivalent to travelling to the moon. The reason- the prices are actually 'moon-high'. It is meant for the elite rich class of the city. But even property in the suburbs has seen prices shooting upwards. Owning a house in the suburb areas like Vashi or Thane could range anywhere between Rs 10 to 20 m. Add to this, the added costs of parking, property taxes and maintenance, and the costs would go up even more. In fact, not just Mumbai, but this could be the story in every metro in the country.

To finance this, one needs to look at taking a loan from the bank. Don't forget, this is not easy either. To take a loan, you need to prove an income (after tax) of one-fifth the value of the loan. Plus banks only give you 80% of the total value as a loan. So to even avail the loan, you need to have the funds and income in place. As a result, many have to compromise on the space or the location of the house that they can afford which is at times quite different from the one they dreamed of.

So you may ask as to why is this the case in Mumbai or any other metropolitan city for that matter? Haven't the property prices eased off? Were the newspapers wrong in reporting the financial woes of developers that would lead to declining property prices? The answer to all of these questions including the last one is no.

Property prices have not declined to the extent as reported. And despite real estate developers facing huge financial woes, they are still not willing to sell houses at cheaper prices. The reason for this is the huge flux of black money that has found its way into the real estate market. Speculators and PE funds have invested heavily in real estate. For them profiting from their investments is the foremost concern. And they are not willing to sell cheap no matter what. As a result, for a middle income group person, owning a house in is still a dream unless he is willing to compromise on the location or even the size of the house.

Do you think that property prices in Mumbai and other metropolitan cities will ever come down? Share your comments with us or post your views on our Facebook page.

 Chart of the day
The number of women in India has gone up sharply in the past decade. So much so that as per the Census, women constitute a larger proportion of the total population than ever recorded in India's history. The population of women in the urban areas has grown by 34% in the period from 2001 to 2011. This has resulted in a jump in the sex ratio in the urban areas from 900 per 1,000 men in 2001 to 926 in 2011. At the same time, population of women in the rural areas has risen by 12%. This has resulted in a marginal increase in the rural sex ratio as well. It has gone up from 946 in 2001 to 947 in 2011.

Data source: India Census 2011

We have been writing about precious metals like gold and silver for quite some time now. So, how can we possibly miss making yet another case for them on Dhanteras? This is the day where buying gold and silver is considered by Hindus to be the most auspicious. Of course, these metals have behaved in a volatile manner in recent times and have kept investors on tenterhooks. But the long term trend is still up according to us. You see the supply of money has gone up a lot faster than the supply of gold and silver over the past few years. And the kind of turmoil that the global economy is going through, we won't be surprised if this trend keeps on continuing for still some time to come. In light of this, there is a very strong possibility that value of money keeps declining vis-a-vis the value of precious metals like gold and silver, where supply cannot be increased at will. Thus, good gains could be there for the taking if a portion of one's wealth is invested in precious metals. As outlined earlier, it may still not be too late to pull the trigger.

Indian markets may continue to gyrate over the next couple of sessions in anticipation of a hawkish stance on interest rates. The Reserve Bank of India (RBI) has not minced words about its intention to continue using monetary tools for taming inflation. However, if the government borrowing programme is anything to go by, the interest rates have nearly peaked. Banks too have turned shy of hiking lending rates in anticipation of interest rates making a U-turn. After all, the slow off-take of credit has hurt the sector growth and margin prospects in the first half of the fiscal. The RBI's dilemma is not new. Whether to focus on broader economic metrics or market sentiments is something that the central bank knows best to handle. However, we agree with the fact that if interest rates continue the vertical move much longer than expected, problems galore will surface for India Inc.

That the Indian government keeps failing to meet its targets is hardly new. Thus, a look at its divestment plans for the year does not come as a surprise. For instance, the target for the year was set at Rs 400 bn and so far this exercise has yielded only a paltry Rs 11 bn. Moreover, this plan has been plagued by various false starts and no clear policy. Entities such as ONGC, BHEL, SAIL and Hindustan Copper which were all scheduled to come out with follow-on public offers (FPO) do not look like they will be doing so in the near future. Of course, it would be easy to blame the volatility in the stock markets as the primary reason why these FPOs have not taken off. But there is a bigger malaise at work. Indeed, the government seems to be interested in divestment only so that it plugs the gap in its huge deficit. Hence, the interest is solely on how much proceeds it is likely to get. But the whole idea of divestment involves much more such as injecting managerial efficiencies resulting from private enterprise in languid government enterprises, promoting competition, accessing technology and even promoting the growth of capital markets through the listing of these valuable entities. These objectives aside, the irony is that the government has seemed to have failed even on achieving its primary objective of only raising funds. It goes without saying that it will have to seriously get its act together and focus more on long term and meaningful solutions in solving its deficit problem.

There was a huge uproar across the world economy when ratings agency Standard & Poor's downgraded US long term debt in August this year. What then seemed like a culmination of all the fiscal mess in retrospect may seem like the starting point of more downgrades and crises. Bank of America Merrill Lynch has forecasted that the US may witness a downgrade from another major rating agency by the end of this year. The trigger for this would, of course, be a probable failure by the Congress to come to an agreement on a credible long-term plan to reduce US deficit. The downgrade is likely come from either Fitch or Moody's. This would only worsen things for the US, which is already combating the burden of high debt and a sluggish economy.

India's focus on actually improving its infrastructure remains a big question mark. The country is planning to invest US$ 1 trillion over the next five years. But, delayed environmental clearances, lack of coal etc, are causing various projects to stall. Delayed approvals for Rs 1.2 trillion worth of projects are also posing a huge NPA (non-performing asset) risk for banks. Public sector banks have sanctioned around Rs 610 bn to the 13 mega projects. These 13 big ticket projects are part of a larger universe of 142 such projects stuck in the country. There is an urgent need for these projects for power capacity addition, urban development, etc to lift off. The power sector especially, is in desperate need of reform in India. Plus, if there is no policy action, various public sector banks may take a huge NPA hit. This could potentially wipe out a huge chunk of their profits. With its promoter, the government also being cash strapped and facing a widening deficit, a bailout also looks unlikely.

In the meanwhile, the Indian stock markets have been rallying upwards today. At the time of writing, the benchmark BSE Sensex was trading up by 277 points (1.7%). All the sectors were trading in the green with maximum gains witnessed in auto and realty sectors. Other Asian markets also closed the day on a high note with markets in Hong Kong and Korea leading the gains. European stocks have opened on a positive note as well.

 Today's investing mantra
"In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch

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19 Responses to "Will owning a house remain a lifelong dream?"

Manoj Kumar

Nov 3, 2011

Everything that goes up comes down and patience is the key word here. Wait fellow non home owners. Till then take your dream house on rent as rents are quite cheap as compared to their costs.



Nov 1, 2011

Property prises in Mumbai has never seen a downtrend in its history. Perhaps one main reason for this is the demand outstripping supplies. This is also evident from the fact that any reduced price offered by builders gets a good response in Mumbai and thus provides support to the real estate prices here.

Most of the Mumbai (within corporation limits) builders work on advance payment terms with the buyers and thus have very good holding powers even though sales drop to zero levels and construction is delayed by 3-5 years time frame. I know of a developer who did not give up (went broke) for 20-25 years after constructing a high rise tower in suburban Mumbai and fell to legal tangles. Its only now after 25 years he started selling balance flats.


Dr R Kapur

Oct 26, 2011

lesson from USA - Real estate will collapse as the speculators will face cash crunch in the slowing economy due to high inflation, reduced purchasing power and the banks will have higher NPAs after they have lost heavily in infrastructure sector. Govt bailout may only delay the imminent collapse in Indian housing sector triggered by NOIDA like situations. Shouldn!t one stay away from real estate at this juncture?



Oct 25, 2011

Growing population, Growing families, reduction in land area are main concern.Sociocultural change, Multiplicity of small families, Each family one house, family`s poor earnings,demand supply ratio are also prim deciding factors, If these are all shorted out then the mentioned Block money flow in to real estate would spontaneously dissolve and vanish in the thin air.



Oct 25, 2011

for everything there is regulatory body.agricultural produce have base rate declared by union government to safe guard the interest of farmer/the poor.at the same time the farmer cannot put price on his produce.in the case of property only the interest of rich is safeguarded.there is no yardstick to price a property as guided by any government body.even the government is not able to control on the builders as they ensure that every building is illegal by increasing the floors or some other
alterations and get escaped by putting money at appropriate corners on one side and on the other side financing the anti corruption publicity there by increasing the property price more.


hs goel

Oct 25, 2011

a person who owns a house i shall call him a successful man

it is NOT AN INVESTMENT IF ONE HAS RESOUCES OR PLANS only then on should go for loan i had my house constructed in a rural area [haryana] when i got the valuver report i was shocked it gave the house life as 40 years so far we have lived in it for 27 years
age kiya hoga your choice



Oct 24, 2011

Failed to read “women population on the rise” chart. Only presumption could lead to a conclution blue indicates women and red is men…



Oct 24, 2011

Real estate prices have increased at a pace much higher than those in income or salary levels of people. Thus prices seem to have little linkage with end user demand or affordability. Its more linked to investment or speculative demand, which can not continue to exist in vaccum with end user demand. In general for an asset classes where speculative interest takes precedence over real user demand, its a warning for bubble. Even though a special case here is the existence of black money, the ballooning of prices should be lesser on higher base, lets hope so.


John P Thomas

Oct 24, 2011

Dear readers,
The good jobs are concentrated in some area.Naturally the price of real estate will be high there.
I suggest that every district of our country should have 10% of its land alocated for Industry and allied services.And such places should be well connected by very good transportation system as well as communication system.
Instead of the present permit raj where only very influential business houses can get it, guidelines should be proclaimed in web sites so that more ordinary people will come forward to generate jobs.And the govt should be only an umpire not a player.

You can see the prices of real estate spreading.



Oct 24, 2011

Rightly said black money, politician - developer nexus,land mafias owned by politicians and their kins.

All this sky rocketed in the recent 8 yrs or so, in the name of economic liberalisation the politicians and their land mafia group purchased huge acres of land around the cities and sold to industry houses and focussed on minting money and expanding the territories of their own.
There is a regulatory body for telecom, insurance, bank, etc why not regulatory bodies for essential thing in life - food, water, shelter(home).
Purposefully our netas had hoodwinked and made crores of people out of reach from owning a house, by inflating the land prices.
Certainly public uprising will happen in our country like what is happening in Newyork and London.

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