Wednesday, August 24, 2005

Real estate prices in Bangalore, a bubble?

What makes a bubble?Businessworld(registration/subscription required) in its recent issue, "The great urban build up", argues that the recent rise in real estate (housing) market is not a bubble for a variety of reasons. It may be true in some of the cities, but to me, a person on the street in Bangalore, it appears to be a bubble. The bubble may have begun, may be at the middle or it may be about to burst (this seems unlikely in the near future), but a bubble is a bubble is a bubble. Heres why my streetside instincts say so, especially in Bangalore.

Unlike a stock market where it takes all kind to make a market so to say, a housing market is in the physical world (ha! that was intelligent). Most people own a house or want to own a house rather than live in a rented property. People who own more than one house usually give one away for rent. There are people who happen to own land/property due to various reasons mostly hereditary, so we leave them out.

A bubble is set in motion, when people in the hope of making a killing, book homes, sell it when the prices move up and then move onto another property. When a few people do it, it does not make an impact. When many people do it, it sets a trend in motion. As a speculator all it takes to buy land is a booking amount (which can be as low as a lakh of rupees). When everybody looks forward to doing this, what do we have but a bubble in the making. Add a booming stock market, cheap loans and the cauldron begins to simmer, nay boil. Where there is demand, there is supply.

Any land is today converted to layouts (by greasing the development authorities at worst and by legitimate means at best) and sold, since there are takers for anything and everything.

A standard argument trotted out for high prices in Bangalore is that in a city like Bombay prices have risen to 5000 per sq ft in some locations. Therefore in Bangalore, prices are still low by that standard. The average price of a new property would still be in the low 2000 per sq ft. So, the average Mumbaikar would feel that the rate here is low as would the builder justifying his price. But in terms of the facilities offered, would a 2000 per sq ft location in Bangalore offer as much as a similar priced property in Mumbai? Unlikely. In Mumbai properties in New Bombay cost about 2000 per sq ft and as far as quality of living goes, they are far better than a place (in terms of access to medical facilities, public transport, reliability of power and water supply, security, roads etc.) in Bangalore. So using that argument to justify higher prices in Bangalore is ridiculous. By that logic, why stop at Mumbai, why not take Manhattan as a frame of reference. Therefore, prices and their relevance have a frame of reference, which are not the same for two cities.

When the rates of property are pushed by speculation beyond what they should be ideally priced, it is the starting point of a bubble. When the whole business of property becomes one of only buying and selling and not buying and living, it is the start of a bubble.

Yes the metro might be built, roads may get widened and the international airport may get set up (That incidentally has been happening for 17 years). If that is the basis for the hype in prices, think about it. Will industry wait for all this? Already there are signs of movement of industry to better cities and India and there is no dearth of people in any big city in India. Also remember that much of the IT crowd in Bangalore (who are the major customers in this real estate party) are non localites who would shift to their home cities or cities up north/west/south if offered a sufficiently good job.

BW maintains that about 30-40 percent of the Bangalore market is held by speculators. So, this is a bubble, meaning prices are inflated, artificially, one way or another. Whether it will burst today or tomorrow is a different point. It may well continue for a period of time. It may also not cause a crash, but there would be a period of stagnation of house prices and not necessarily result in a crash.

Therefore, caveat emptor!

15 comments:

Anonymous said...

Hi,

I am tempted to post my 10 cents almost an year later. do you see the bubble? yes, i can feel it but dont know what to do. I was scared enough not to invest and a year later, all the folks who invested are laughing all the way to the bank... and the rates have reached greater (ridiculous?) heights.
What do you have to say, NOW??

udayan said...

Hi
If people/business move out from bangalore, where do they go?, you said north you mean delhi, there is a power shortage, east? you mean Chennai, this part does'nt go beyond amma or kalaigar incidentally both are not investor friendly, South ? Kerala ? yes govts of kerala and kolkata can provide better environment than Bangalore for IT companies, catch is campuses of IT companies should also accomodate trade union offices. Another metro is Mumbai, SM Krishna is there, but they are not using them, he is thinking of coming back.

Anonymous said...

Its been an year since you have written this article. Any signs favouring/disfavouring ur argument?

Anonymous said...

Hey guys,
checkout last week's timesofindia(bangalore edition) where they have specifically mentioned that over period of last six months prices have stabilized and it seems in future(2 to 3 years) there is huge supply of apartments(1.5lac) but demand is around 30000 per year
I think its better to wait for some more time.

Anonymous said...

I wonder why everyone in bangalore wants to stay in only one part of the city?? If the metro comes up the land prices would have to go down, how would it matter if you travel 5kms by metro of 15kms? Roads getting better reduces travel time you can move to more suburbs instead.

Anonymous said...

There is already slowdown in the Market as everybody expected. Number of bank transactions are the witness. increased interest rates(12.25% to 12.75%!!!) made all employed people to stop thinking of loans. Mid 08 we can expect some more slowdown as the Rupee value doesn't falls and dollar doesn't improve. I don't understand how increasing interest rate on existing loans helps controling inflation.

Anonymous said...

Property prices all over the world are falling. The current real-estate boom was started in the US post-2000 because of subprime-loans and low interest rates. Now that it is very clear that the US housing market has collapsed, it's only a matter of time before the Indian market is impacted.

Anonymous said...

Its pure mathematics.. if your income has not increased as the Prices of Home, the balance is broken and some one is fooling others. You can't fool majority forever. Somebody made quick money doesn't mean he will continue doing so to same people ever.

The Bangalore Real State prices are Bubbled and 30-50% more than what it should be.

Anonymous said...

Simple Logic. In any booming realestate market Mumbai, delhi, Banglore, have many units are empty, these r bought by greedy investors want to make quick bucks.In Rental market, rent recd justifies value of property, mostly NO, there is no way this market can sustain. we need to remove blank band of greed covering our eyes, we have very short memory about our losses in stock market. There are no economical fundamental to support this bubble. I m US resident with tons of sensible REAL ESTATE investment in USA & WORLDWIDE. This market is hyped up by NRIs,speculators,& Builders and builder lobbied analysts & press. All greedy people are forgetting simple rule of nature" Faster & higher anything goes up , harder & much faster it falls. Believe Me all this greedy investors & speculators in INDIA are going to cry soon like mkt in USA & worldwide market crash

Anonymous said...

All good comments here....and everyone is confident that it is a bubble.

Indian market cannot be comapred with US market due to the following reason. 1. real estate is n times bigger than India. US populaton is n times less than that of India. So the land prices cannot go up just like that.

Now India, the land prices are high now, but, if you take the avarage price o the villages and cities, it is not that great. In India, we have to stay close to the city because transportation is slow and we still talk about 40km per our while US it is 110km per our road speed.


Moreover, over the past 10 years rich people became 10-20time richer. There are some rich guys who can even buy a big city itself. Now, do we know how many ich people are there in major cities like Banglore who are controlling th price? I agree the major control is through middle class IT people...however I guess the many people have got lots o money to affort today's land price. Our increase in population and per capital income together sending the value up.

Many people like me were pessimistic and missed the bus many time....you want to be one among them? If you do not want to be, then do a safe investment in a staggered way. (This a very poven investment technique - buy only small properties.)

Also, buyig land is much much better than apartment. But apartment value cannot go down much, if you are investing in developing area - so less risk.

But, if it is a bubble - I dont think people like us can figure it out just like reading some signs or count number of rich people. Lots of factors need to be conidered as only a veteran ecoomit can tell that for you - it is pretty complex and interlinked system.

US housing crash was attributed by several other factors that are not applicable to India. But this can have small impact in our market. Happy investing.

Binoy Jose, Mancheste

Anonymous said...

I think the crash is coming. I am seeing Ads by promiinent builders saying "Pay 15% and book. Pay the rest on possession".

This line doesn't augur well for the greedy builder lobby who until a yea ago even insisted that you pay the club membership fee of 2 lakhs even before building the club and regular monthly installments irrespective of when they deliver the apartment.

Anonymous said...

I guess the crash is finally there...for the first time TOI Bangalore edition today says that the "North" Bangalore real estate market will correct by 10 - 15 %. But I think it will be more than that. Bad news like Crude prices, stock market crash, inflation, central govt instability will only add to the woe and finally bring down the market here like a pack of cards...

Anonymous said...

Folks, nice dicussion thread.
The bubble in bangalore started depleting.

Now the next bubble in queue is chennai, the has already been setup in chennai, any guess when the same will deplete? My gut feeling is very soon.

numa said...

What are the current rates/SFT in Bangalore now?

vipin said...

i can see 20-30% correct price in bangalore .is it a right time to buy?