Downward Trend

According to DNA, property prices are heading south, even in previously non-impacted areas like Khar/Santa Cruz.

It will be interesting to see how long this downward trend continues. The source of the article predicts 4 months, which is consistent with the "temporary dip/correction" view espoused by various "experts". Of course, most of the professionals in the market now have never seen prices fall, so along with the rest of us they have no idea what is going to happen.

Personally I feel the decline will last much longer -- once prices start going down most people stay out of the market, since nobody wants to invest in something that is losing value. This perpetuates a cycle of downward pressure on prices causing increasingly negative sentiment and vice versa, which will only stop once rent prices align with ownership prices. As explained in a previous post, Mumbai is nowhere near that level and it will take much longer than 4 months to get there.

Also, there will be a continuing new supply of property added to the market, as developers have vastly over-bought and overbuilt in planning for a demand that has disappeared. This lack of synchronization between supply and demand in housing markets is one of the key factors behind the general trend of property assets to follow boom/bust cycles. Its more and more looking like Mumbai is in a bust.

MCHI Property Fair Fallout

In TOI, a follow up to the failed MCHI Property Fair from the previous post: in an effort to prevent real estate prices from falling quickly, developers are freezing flat prices until Diwali. The quote from the article sums up the approach: "It's a psychological pressure tactic by a cartel of builders to push [potential buyers] into taking a decision quickly".

This looks like an ostrich defense by the builders against increasingly slack demand. Flat shoppers are known for patience, especially if the public sentiment is that we are in a downturn. The builders will incur significant holding costs, and at some point will be forced to sell their flats for reduced prices in any case. “Waiting for the rebound” never works – see the infamous Japan property bubble for an example.

There is also an article in HT about the increased focus on affordable housing. Good strategy by the developers as folks are no longer willing to part with multi-crores for a 2br/h/k flat. Of course, they still have the problem of a general oversupply that they will need to drastically cut prices on to move.

Breaking Down the Media

Woe to the consumer who tries to gauge real estate market trends by reading the press.

Conflicting reports are everywhere. On one hand, the "high-end luxury market is in the dumps" according to the Economic Times. However, the same paper also reports that "Real Estate Prices are staying high on firm demand" and "The Real Estate Sector is Shining." The second article especially reads like a developer advertisement, including even fake quotes from happy new homeowners.
“Rishi, my husband and I had zeroed down on a house last year itself, but since we didn’t have the paying capacity then, we decided not to indulge in the house buying, while now since its an absolute wow situation as we have more disposable income, we surely can fulfil [sic] this dream of ours.”

Of course, all of the reports are based on quotes from "experts" -- no analysis of any data, since as I've pointed very little real data exists.

Back on the bearish side, DNA had an illuminating article about the MCHI Mumbai Property Fair, where according to a couple Goldman Sachs analysts sales were very disappointing:

The fair from March 17 to 21 at the Bandra Kurla Complex proved to be a dud, say realty experts. The reason? High prices quoted by developers, which were beyond the reach of even the upper middle class. Even Goldman Sachs in its report has said most flats were overpriced.

This same fair was covered in more rah-rah fashion in HT and TOI -- those articles were in their real-estate supplement sections (HT Estate and Times Property), and not available online. Those supplements only exist to sell real estate, so no surprise that the coverage was positive.

The bottom line is that any newspaper report on real estate trends should be taken with a grain of salt:

• Media companies have an active interest in perpetuating high prices. Developers are the biggest advertisers in most of the standard papers -- and indeed, some of the content seems to be provided directly by the developers and Real Estate industry.
• Reporters are as clueless as we are -- they have no way to analyze the market, other than asking "industry experts" for opinions. For the most part, these experts are not impartial observers.

Transparent Flat Pricing

The media has been reporting on a very small tidbid of good news for the Mumbai property shopper: developers must now sell flats based on the carpet area (HT article)(TOI article). Previously developers could quote whatever square footage they wanted to, based on build-up, balconies, and common areas. Now they are limited to strictly the carpetable area in the flat.

This is only "good news" in that the buyer will now know the correct square footage of the flat. Contrary to insinuations in these articles, flat prices will not change. The developer can still charge whatever rate he wants per square foot, and can charge for other common items as he feels appropriate. Still, this is a well overdue fix that is already the status quo in most countries.

Hopefully this is the first step towards a holistically more transparent system. They key problem that I have found, as a shopper, is that there is no reliable data about the marketplace.

For example, I am looking at Juhu flat that is on the market for 2 crores. I would like to know what other flats in the building or nearbye buildings have recently sold for, so I can get an idea what the going rate is and if the price on this flat is fair. The agent tells me of a couple recent sales for a similar rate. Later, I talk to someone in the building and get a different story completely -- that there have been no recent sales. Then, someone else tells me that a comparable flat recently sold for 1.5 crores. So, who do I believe? What is really happening in this market?

A reliable record of recent sales is very badly needed. Given the opaque nature of the purchases themselves (i.e. black money under the table, inflated prices followed by cash back to the buyer, etc.), we are not likely to get here anytime soon. This lack of information makes it very easy for sellers to mark up properties to ridiculous levels and dupe buyers who falsely think that the rates will only go higher. This is one of the main drivers of our current property bubble.

Why Mumbai Property is Bubblicious.

The posts at the right explain a bit about real estate bubbles, but they don't capture exactly why the current high prices reflect a bubble vs. normal appreciation. We can expect that housing prices will generally go up at a certain rate so long as incomes and population also increase. So, how do we know that the current prices are inflated due to speculation?

Simply put, we know this because the rental rates are totally out of sync with the property prices -- over the last couple years, we have seen 200% increase in property and only a 15% increase in rents. There is a fantastic article here that explains when renting should be preferred over housing. In summary, both owning and renting provide the consumer with a specific commodity (a place to live), and both have a certain cost. The longer one plans to stay in the new residence, the more likely it makes sense to buy, assuming that the buying price is in proportion to the renting price.

Here is a calculator that I used to make the comparison for the properties I was looking at. I used 20% down payment (usual in Bombay is 15%), loan rate of 11%, and property tax of 1% (also likely too low, buy lets be generous to the buyer).

Example: In my building in Versova, 2BHK 900 square foot flats are selling for around 1 crore. These same flats are renting for ~35,000 RS. Using the calculator, we can see that even after 30 years the buyers of these flats are big losers in comparison to the renters, even if one assumes a generous 4% appreciation rate. If (as is more likely) the appreciation rate is less, the "investment" becomes even more of a disaster. Even if 50% is put down up front, it still takes 30 years to recover the investment – not good considering where else you could put that ½ crore to work.

About the Blogger

I'd like to use some space to tell you a little bit about myself so you can best understand where I'm coming from, what my purpose is in writing this blog, and what I personally believe with respect to a real estate / housing bubble.

I'm 31 years old, living in the Versova area of Mumbai, and have been working as an IT consultant at Accenture since 1999. I currently own and reside in a 2BHK flat with my wife, 3 month old daughter, servant, and our dog Scrappy. Our flat was purchased for 35 lakhs in 1996.

Our flat being paid off, and having some extra money, we spent some time over the last year looking into investment property in the area. We were shocked at the prices being asked, and grew more discouraged as prices became more and more unreasonable during the year. In addition, as we shopped I did a lot of reading and research. The more I read about housing and real estate in general, the more stories I noticed speculating that there was a bubble. I decided to start this blog as a way to collect these stories for my own future reference as well as to generate discussion among other interested parties. I figured that in a region with over fifteen million people, a decent number of them might be just as interested as I am in the subject.

Given all that I have read as well as what I have observed, I do believe there is a speculative bubble in real estate right now. I don't know it for sure and I could be convinced otherwise, but that's where I stand right now. I believe that the present real estate bubble is due to a combination of factors, among which are:
• Easier availability of home loans than ever before
• Speculators trading properties amongst each other
• Buyers flush with higher salaries and stock market gains

One thing I do know for certain is that the recent trend of rapidly increasing property values (double-digit increases year-on-year) cannot possibly continue indefinitely. If it did, eventually everyone would be priced out of real estate. There has to be a slow-down sometime, and I think it's coming fairly soon if its not here already. I don't know if it will take the form of a leveling off of values, or a slow decrease, or a sudden decrease (bubble bursting), but I know it is coming.

Therefore, we have decided to stay out of the housing market for now and park our money elsewhere. Hopefully by the time sanity returns to the market, we will have enough saved to afford something that much nicer.

Given the options and the uncertainty of the current market, not buying right now seems to be the best choice for us. So that's where I'm coming from. What about you? Do you currently own property, are you holding out, or just not interested? Have you recently bought a home, or are you buying properties as investments? What do you think about the possible risks?

Welcome to Bombay Bubble.

Welcome to the new blog, "Bombay Bubble." This blog was created to post news stories and generate discussion about the real estate/housing bubble and specifically how it affects the Mumbai area.

Questions we will explore:

• Does a real estate/housing bubble exist?
• If not, why not?If so, why?
• If so, when/how will it end?
• etc...

Many other informative blogs and sites exist to discuss the bubble in general or specific to other locales. I highly recommend you educate yourself through the links in the sidebar. To be honest, the main reason I'm starting this blog is to collect information for my own interest, and I just figured that if I'm this interested in the subject, maybe some other people in the area are too. I hope you find this to be a useful resource.