Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The real side of real estate... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 21, 2006

    The real side of real estate...

    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 gradual...my 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

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms