[reverse_gear]

Originally Posted by phamilyman

So please help me understand why EMI >> rentals in India? (before even considering interest cost on equity)

A rule of thumb in Gurgaon is 4-10x (EMI = 4 X monthly rental) from my experience. Even if you discount 50% to account for the recent rise in the last 5 years, its still 2-5x.

Expectations of capital appreciation on property. If you buy a property for 1cr today and property value goes to say 2cr in 5 years time, buying it and paying EMI still works out better than renting. Unless you are of the view that rentals do not change at all irrespective of capital value, which is not the case.

[Samurai]

Originally Posted by tsk1979

The basic theory of demand and supply and its impact on pricing is failing right before our eyes, why?

It ain't failing at all. The seller may be waiting for the next price boom.

Originally Posted by phamilyman

So please help me understand why EMI >> rentals in India? (before even considering interest cost on equity)

As alpha1 and reverse_gear already replied, it is done for appreciation in capital.

There are lots of people buying plots and keeping it for decades, there is no rental at all. In fact, they end up paying property tax on that unused plot. My maternal aunt bought a site in 1991 via loan, despite fierce opposition from her husband. Twenty years later they sold it at 100 times the purchase value.

[phamilyman]

Originally Posted by reverse_gear

Expectations of capital appreciation on property. If you buy a property for 1cr today and property value goes to say 2cr in 5 years time, buying it and paying EMI still works out better than renting. Unless you are of the view that rentals do not change at all irrespective of capital value, which is not the case.

Rates have gone up in HK as well - not India level, but prices have still increased at 8-10% annually on the average as per some of my friends (for the places where they bought the flats). The magnitude of the gap is just not understandable.

Originally Posted by Samurai

It ain't failing at all. The seller may be waiting for the next price boom.
As alpha1 and reverse_gear already replied, it is done for appreciation in capital.

I think the market has reached a point where their belief is irrational, going by the stagnation in the gurgaon market over the last 2 years.

[reverse_gear]

Originally Posted by phamilyman

Rates have gone up in HK as well - not India level, but prices have still increased at 8-10% annually on the average as per some of my friends (for the places where they bought the flats). The magnitude of the gap is just not understandable.

You may be right in that pricing appears to be way in excess of what is represented by normal rental yields. But this represents the differing perceptions of buyers and bystanders with regard to the potential for capital appreciation.

HK comparison is relevant for investors who have the option to choose between investing in these markets in substitution. However, that is not the case. So, investors for Delhi real estate can only compare with other options available to them, which is predominantly other Delhi properties or, at the most, other cities in India.

I am not trying to justify the pricing of real estate in India which is largely an imperfect and dodgy art. This is to just give some basis for the pricing vagaries.

[drsingh]

I recently talked to a banker regarding real estate prices. Smart money is staying away from real estate. The builders who have built surplus high price colonies are unwilling to lower prices. They are willing to wait it out. Most of them have dodgy loans from banks or deposits from prospective buyers /home loans from prospective buyers. They are in no hurry to complete projects.

The 'investor' buyers too have locked up their flats etc and don't rent then out as rent yields are low. Not worth the risk.

The best way to own a new home in the present scenario is to build your own. And take double tax benefits if husband /wife are joint owners.

[ramzsys]

The prevalence of black money has ensured that real estate prices stay totally out of whack in the country.

According to one study, it will take an Indian with the average per capita income 580 years to buy a top-end property in Mumbai, compared to 65 years in Hong Kong, 62 years in Paris and 47 years in New York.

source: http://www.rediff.com/money/report/p...y/20141205.htm

[arunkumarsarat]

Originally Posted by Samurai

The economic theory obviously applies to Mumbai. Just see a typical demand curve, and you will know why.

The simple demand curve can be used to answer most of the questions in this thread.

The demand curve keeps changing its elasticity according to whether the market is competitive or monopoly in nature. It shifts due to an increase/decrease in demand when ever any of the determinants influencing demand changes.

Coming to the property market in any of the tier 1 cities in India, the demand curve is relatively inelastic since at any given time a large number of people are looking to buy. There is a huge demand for commercial property in such cities. When commercial and residential property fights it out, you sure know the winner. This naturally makes the residential property prices to go to the sky and stay there.

However the demand curve for property in tier 2 cities is elastic in nature due to various reasons like more availability, lesser income levels and more competition (since smaller builders are also in the fray).For the past two years, property prices in these cities have been stagnating and many who purchased to resell later at higher prices are unable to do so. Prices may not come down but you may get a house after two years at today's prices.

[reverse_gear]

Originally Posted by arunkumarsarat

Coming to the property market in any of the tier 1 cities in India, the demand curve is relatively inelastic since at any given time a large number of people are looking to buy. There is a huge demand for commercial property in such cities. When commercial and residential property fights it out, you sure know the winner. This naturally makes the residential property prices to go to the sky and stay there.

Sorry, my observations suggest something entirely different. Inelastic demand curve would mean that you have buyers at all prices. If you see the examples of Mumbai and Delhi over the last few years, this is simply not the case. The sales of high end flats in central and south Mumbai have been very, very slow for the last 2 years and there are very few buyers coming in. But once you move one segment lower and start looking at relatively VFM properties in Chembur, Ghatkopar, Goregaon, etc. the sales volumes are much better. In Gurgaon, prices have been stagnant or in marginal decline for the last 2 years. But very few buyers at the prices quoted, and buyers (like @tsk1979) are holding on for prices to drop before coming in. This price sensitivity indicates significant elasticity in the demand curve.

Commercial property has been stuck in a rut for the last 5 years in Mumbai. Central and south Mumbai rentals have come off by big margins. When One Indiabulls Centre (a premium office complex) was built in 2008, the office rental was Rs.175/sft (my company was one of the biggest tenants at that time so they had got this as a preferential rate). Now the rates for same or similar properties are Rs.90-120 /sft. Accordingly the capital value has also fallen drastically. Nariman Point office rentals used to be >Rs.200/sft at that time. Today, there is a lot of vacancy there and rentals are at best Rs.100 /sft for most buildings. Demand for commercial property is way less than supply, so people are not even projecting the possibility of price appreciation in the next few years.

[NetfreakBombay]

Originally Posted by arunkumarsarat

Coming to the property market in any of the tier 1 cities in India..
...There is a huge demand for commercial property in such cities.

In Mumbai, supply exceed demand at current rates.

There are malls and office spaces that have been built and are not finding takers.

[maddy42]

Digging in more i had a few more queries:

Currently most of the jobs are concentrated on the Metro cities like Mum, Chen, Blr, Hyd, Pun, Del NCR, thus most builders are having a building frenzy. What if the govt is able to kick start industries and more jobs in other areas excluding this, do you see a chance of the metros getting their price stabilized? Or addition of more folks into the middle income category just make prices remain the same?

Also how does the population with most of it under a particular buying power affect calculations?

The reason for my queries is i do note people are throwing money at anything which looks like a piece of land. Rural agri land prices which are close to some economic activity have reached levels where you are surely never going to get a return by cultivating anything. Its just a investment.

Last point, there is massive investments in our country from the nri population. If the economy in the home country fails, which may result in job losses and strained income, how would that in turn affect the investment?

Maddy

[alpha1]

Originally Posted by NetfreakBombay

There are malls and office spaces that have been built and are not finding takers.

Time and again I see that people are confusing two things:
a) demand for land/house/space as investment (owner)
b) demand for land/house/space as consumption (tenant)

You are seeing empty malls and office spaces. Which show that there is a poor demand for consumption. But there is a larger fact looming, which is that these buildings were constructed.

Usually builders are not neophytes who will put in their own complete money to construct a building fully and then wait out in the sun looking for buyers. This means that there are owners of those land/house/office spaces who are choosing not to rent their place at the current market price. These owners may not be the builders.

Originally Posted by maddy42

What if the govt is able to kick start industries and more jobs in other areas excluding this, do you see a chance of the metros getting their price stabilized? Or addition of more folks into the middle income category just make prices remain the same?

I believe the addition of folks into the middle class that can afford a home loan is increasing at a faster rate than jobs moving out of the metros. Come to think of this, why does the majority of folks move to the cities. I can guarantee it is not for the night life, pubs, discotheques that a city offers.

Therefore the urban housing bull run may not turn into bear run anytime in near future.

Last point, there is massive investments in our country from the nri population. If the economy in the home country fails, which may result in job losses and strained income, how would that in turn affect the investment?

Maddy

Wow, great point. And very complicated.
If NRI face the flak and decide to stay there only liquidating the assets in India - that should bring the price of house down, with no change in rentals.
If NRIs decide to come back and live in India, the price of rentals may go up.
If NRIs come back and are unable to find meaningful employment, they may be forced to liquidate - thus bringing the prices down perhaps as well as rentals (average income of the consumer goes down).

I don't think anyone can provide a real answer till we actually experience it.

[Samurai]

Originally Posted by maddy42

Last point, there is massive investments in our country from the nri population. If the economy in the home country fails, which may result in job losses and strained income, how would that in turn affect the investment?

Careful... using economics to analyse is one thing, but using it to predict the future is something else.

Understanding of economics is used to craft monetary/fiscal policies after studying the economy of a country or industry. It is basically a planning activity, and the plans can get derailed due to political/business uncertainties and events. Economists should be analyzing and planning, not predicting. But people keep asking/demanding economists to do predictions. When you ask for BS, you will get it.

[maddy42]

Thank you!

Last query i had was with regards to what kind of society is ideal. I know this is a toughie. Do you think capitalism like Mericaaaaa where health care and very limited social net is good or like a canada or a finland where taxes are high, but costs like healthcare and support are free. What is our current model called or what would you call it?

Maddy

[NetfreakBombay]

Originally Posted by alpha1

Usually builders are not neophytes who will put in their own complete money to construct a building fully and then wait out in the sun looking for buyers..

Does not matter from economy point of view. Someone is eating losses, be it builder or the investor.

Till when can that entity sustain the losses, would depend on for how long can it afford to bleed without dieing.

In Malad/Goregaon for example, 3 Grade A malls have Zero occupancy. Overall 28% of commercial (A Grade) space is vacant.

http://www.cushmanwakefield.com/~/me...i_off_1q15.pdf

[arunkumarsarat]

Originally Posted by maddy42

Thank you!

Last query i had was with regards to what kind of society is ideal. I know this is a toughie. Do you think capitalism like Mericaaaaa where health care and very limited social net is good or like a canada or a finland where taxes are high, but costs like healthcare and support are free. What is our current model called or what would you call it?

Maddy

Theoretically our model is that of a mixed economy, partaking the features of both capitalism and socialism. It is supposed to be the best of both worlds, though right now no one would agree. All that our planners and economists envisaged at the time of independence has gone down the drain.


The American capitalistic system is successful since the freedom given to private industrialists has paved the way for research and innovation resulting in the creation of several top of the line companies. The country has managed to attract the best brains and capital from around the world.

Coming to your question on countries providing free health care, education and support, it is possible only in countries where the government has spare money lying around. Hence it works well in European countries with high taxes and a small population. It also helps if the country has access to oil or mineral deposits.