The real side of real estate... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

The real side of real estate...

Jun 21, 2006

In the past three years, we have been witness to one of the sharpest rise in real estate prices in India, after the bubble in the mid-1990s. In the same period, more so in the last one-year, many 'real estate' companies (not sure how many are 'real') have seen dramatic increase in their valuations. Let us put things in perspective. The HDFC presentation has, time and again, maintained the fact that shortage of dwelling units in India is in the vicinity of around 19 m (there has been a marginal fall in the same, but not very meaningful). So, the demand side has never been an issue. Ultimately, every individual dreams of owning a house at some point in his life.

In our view, what is important to focus is the 'affordability factor', which is determined by broadly three parameters i.e., property cost, income levels and interest rates. Prior to 2005, it is a known fact that the fall in interest rates on housing loans and income tax sops to individuals on housing loan repayments, boosted demand for housing in the country. The graph below (Source: HDFC presentation) highlights the trend in property prices in south Mumbai, the income growth and the affordability (affordability here is derived by dividing the cost of the property by average annual income). As is evident, the rise in income accompanied by decline in property prices, till 2000, resulted in property being 'affordable' for individuals. After remaining stable till 2002, property prices starting accelerating at a faster pace led by robust demand, with supply still lagging.

* Affordability is calculated as 'property cost divided by annual salary' and is shown as a multiple (x) above.

But if one were to extrapolate HDFC's figures post 2004 (these are our assumptions), property prices in Mumbai have more than doubled (depending upon the location). Assuming a 9% growth in annual income of households in general, it is clear that property is not that affordable as it is made out to be. This is because prices have skyrocketed and the supply side is still lagging (in terms of good quality construction).

Add to this is the fact that interest rates have started moving up in the last one year. With further increases on the anvil, we expect affordability to worsen even further. While we are not trying to predict property prices, basic economics tells us that demand tends to slow down when prices start accelerating beyond affordability.

In the latest Annual Report for 2005-06, Mr. Deepak Parekh, Chairman, HDFC has highlighted the fact that "we need to exercise caution. As in every cyclical environment, a downtrend is inevitable. Availability of easy credit leads to speculative buying. When the dream run comes to an end and prices fall, it leads to a decline in housing equity, borrowing and spending; also widespread defaults could generate a contraction in economic growth."

He further goes on to say that "the siren of caution in the real estate market is now ringing loud and clear...southwards is where prices must go, but the correction has to be fervent prayer is for an element of sanity to prevail in the real estate market, before it is too late."

While it is not the end of the real estate rally, in general, like any commodities, property prices also go through the boom and bust cycle (in fact, the rise in property prices is not just unique to India!). The reason why we thought it is relevant to highlight the property market to our readers is that even after the fall in the stock markets in the last one and half months, we still hear brokers selling 'real estate' stories to retail investors. While some companies have a long-term strategy to tide volatility in prices, it is pertinent that we, as investors, exercise caution in our judgment. Ultimately, it is our hard earned money!

Equitymaster requests your view! Post a comment on "The real side of real estate...". Click here!


More Views on News

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms