A few confessions on real estate forecasting

Jul 28, 2015

- By Vivek Kaul

Vivek Kaul
In the recent past I have written quite a few columns on real estate. In some of these columns I have clearly said that I expect the real estate prices to continue to fall in the time to come.

In response to this point a question that gets often asked is: "Should I buy a home now?" This is a very difficult question to answer, given that it has zero information built into it. It doesn't tell me where the person asking the question is based out of. Does he want to a buy a home to live in? Or is he looking to invest? Further, what is the financial situation of the individual? So on and so forth.

I will try and answer this question in today's column in a fairly general sort of way. If you are looking to invest in real estate this clearly is not the time to invest, given that the prices are falling and the return over the last one year has been extremely subdued. The time to invest in real estate will come once the prices have fallen from the current levels.

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How about buying a home to live in? That really depends on your financial position and how stable you are in the current rented accommodation you are living in. If the landlord is likely to let you continue to live, then it is best to wait it out. You will definitely get a better deal in the days to come.

If he is not and you have enough money going around then it is best to buy a home. Obviously, you need to ensure that you aren't using up all your savings in making the down-payment and stretching your home loan limit to the hilt. While you will end up paying more now than if you were to buy a home somewhere down the line, there will be other happier things to look forward to.

The social pressure that comes with not owning a house will go away. The child (or children) will have a more stable environment to live in. And given these reasons, if you have the money and need a home to live in, it makes sense to go ahead and buy one.

All this comes with a small caveat-if you are thinking of buying a home in the National Capital Territory, be very careful. As Santhosh Kumar, CEO - Operations & International Director, JLL India recently wrote: "The National Capital Region (NCR) has some locations that buyers are best advised to avoid. Various issues like delays in delivery, oversupply, speculation and infrastructure deficit have been plaguing these markets, rendering them unsuitable for first-time home purchase."

Another question that is often asked is: "By when do you think price of real estate will fall dramatically?" This remains a very tricky question to answer because there is no credible price-volume data going around on Indian real estate. (i.e. how many homes were sold and what at price).

The only real estate data that is available at the agglomerated level is supplied by real estate consultants. The trouble is that these consultants make more money when the real estate sector is doing well i.e. prices are on their way up. Given that, even though the data supplied by them is showing excessive inventory of unsold homes and more or less flat prices on an average across the country, the actual situation might be much worse (which means the crash in real estate prices might happen sooner rather than later, but this cannot be said for sure).

Further, the data supplied by real estate consultants is at best limited to metropolitan cities. Given that, there is almost no information about the price-volume trend of real estate beyond the top cities in the country. So how does one predict, when will prices fall dramatically all across the country without much data?

Further, the real estate indices that India are not "real time" enough. The two main indices put out by the National Housing Bank and the Reserve Bank of India, are really not up-to-date.

Then there is the biggest variable of them all: black money. How does one figure out whether the total amount of black money going into real estate has gone up or come down? In this scenario one can make educated guesses from the data that is available and anecdotal evidence that keeps coming in.

An interesting experiment was carried out by a friend of mine recently. He called up several real estate brokers from two different numbers. On the first call he pretended to be a buyer and was told "Sir, daam abhi bhi badh raha hai (the price is still going up)." On the second call he pretended to be a seller and was told "Sir, there are no buyers in the market." What conclusion can we draw from this? I leave that up to you.

As far as black money is concerned, the situation in National Capital Region, makes for an interesting reading. As analysts Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research report titled Real Estate: The unwind and its side effects: "In Delhi, the ratio of unaccounted value of real estate transactions to the total value is as high as 78%. The same ratio is 50% in Kolkata and Bangalore. In smaller towns and semi urban centres, nearly 100% of property transactions are conducted in cash."

Hence, among the bigger cities, the maximum amount of black money goes into real estate in Delhi and the National Capital Region. And this I feel has been coming down. The real estate rating and research agency Liases Foras estimates that the National Capital Region had an unsold home inventory of 71 months (the real situation might be worse) as on March 31, 2015. This means that if sales continue at the current pace it would need another 71 months to sell the existing number of unsold homes. An inventory of eight to 12 months is considered healthy.

What this huge inventory clearly tells us is that the amount of black money coming into real estate has come down in the National Capital Region and this is good news for genuine buyers who want homes to live in.

Over and above this, the real estate prices have run up way beyond what most Indians can afford. And once you take this into account, prices are bound to fall. This becomes very clear from the point that rental yields are now as low as 2% (again a data point provided by real estate consultants and given that the situation might be worse). Rental yield is essentially annual rent that can be earned from a home divided by its market price. No market can keep working beyond a point without catering to what the customers really want.

All these reasons, lead me to believe that real estate prices will continue to fall in the days to come. Though please don't ask me when will they crash? Because I really don't know.

This is one of those funny situations where one will be partially wrong till one is proven right. All I can say to conclude is: stay tuned!

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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5 Responses to "A few confessions on real estate forecasting"

Satheesh

Jul 29, 2015

"An interesting experiment was carried out by a friend of mine recently... What conclusion can we draw from this? I leave that up to you. "
I think both the observations are consistent. While dealing in properties where there is a clash of interest between individual buyer/seller and a builder, the real-estate agent will always favour the interests of the builder. This is because it is also in the agent's interest that builders come up with more projects in future which will give him assured gains in future. On the other hand, individual seller/buyer's behavior is not regular and he may or may not come at regular intervals for transactions. So, the agent should be suggesting that prices are going up (to a buyer) and that market is dull to a seller (so that the builder involved can empty his kitty first).

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G Surendra

Jul 28, 2015

the article seems to be very optimistic of the fall in real estate prices but the ground realities are different. The source of black money is mainly corruption and real estate is the best option to hide it. There may be stagnation and temporary falls but as long as there is corruption real estate prices will rise.

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Sanjeev

Jul 28, 2015

The amount of black money presently going into real estate may be falling. But with the black money already present there, should we reckon with the fact that holders of black money have terrific holding capacity? They probably won't need to do distress selling. Who knows, they can hold even more than 10-15 years and prevent prices from falling.

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PVSubrahmanyam

Jul 28, 2015

Good one Sir
Really it is difficult to predict in the realestate sector
in view of too many variables some on record and some off the record
In Business Line one expert commentator has said the wages in construction business have shown down ward trend and it is has impacted RGNEGS scheme

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Sridhar

Jul 28, 2015

A builder (Chennai, OMR) recently sent out notification to its customers that the guideline values have gone up. Even the price they quote for new buyers for same project, have gone up...So the general trend itself is different in different markets within a city and then between cities. General trend of course is there is no huge demand / rush in any market. Some isolated markets will see crash but to say that overall prices will crash is going after a mirage....For first time buyers, the rent saved + income tax benefits definitely pays at least 50% of the EMI (for salaried people in the Rs.10-15 lacs p.a. bracket) provided the property is at a reasonable market with potential for future overall improvement.

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