Read an interesting interview with Robert Shiller (Irrational Exuberance guy) who is now predicting some sort of bottoming out in the US real estate market. Interestingly, he added a section to his book last year saying the property market there was likely to head south.

The US real estate market to quote an investment banking friend of mine, is detonating all over the place. Actually he told me this four days ago. And a few nights ago, the Dow Jones tanked followed dutifully by Japan, Asia and of course good ol India.

Shiller says he has been reading up articles and stories on what triggered the previous fall in the US. Interestingly, I embarked on a similar academic exercise, trying to understand what brought the real estate market to its bottom after 1994. I am not quite there as yet, but Shiller says one signal is when people start talking about how they were `had’ in a certain transaction.

Stories of stupidity

This is what he said in a Business Week article last week. "I've been reading old newspapers and advertisements to see how past booms ended. It's usually when stories start to circulate that embarrass people who believed in the boom. For example, there was a Florida land boom [in the 1920s]. There were stories of people buying land that was swamp. Booms end when prices start to fall, and then there are stories of buyer stupidity that are told and retold. I sense that's happening now."

Interesting, isn't it ? I met someone from a large conglomerate (with a substantial presence in real estate) on a flight into Delhi last evening. According to him, the functionary in his organization who drives the real estate business has predicted that 2008 is the year when the Indian property markets will turn. The same gentleman predicted the 2003 stock market bull run several months before it actually happened. I know because he told me !

So I am somewhat inclined to believe this statement. Of course one cannot guarantee this things. My American investment banker friend was telling me that the loan market was witness to the most amazing recklessness in lending last year. You went to a bank and applied for a loan. "What do you make?" the bank would ask. "Oh, $50,000, you would say." "Okay, here's your loan, enjoy !" Almost like that.

Bubble Or Not ?

The same gentleman I met on the Delhi flight said he was hearing of downward pressure on prices in areas like Gurgaon (outside Delhi) particularly when the sale was initiated by a seller, as opposed to the buyer landing up. This might be happening in other places too.

So will it all pop ? I have no clue except to say that if its happened before, it can happen again. Unlike many of my friends who think the only way is north, because India is growing furiously and all of that. I don't necessarily see a correlation but this is one of those things where its easy to take a position but difficult to go with anything but gut whilst defending the same position !

Shiller's insights are useful though. "Bubbles don't pop suddenly. The air comes out gradually. More and more people decide that the market is turning."


Arun Cavale said…

Another spot on and timely post..couldn't agree with you more.

I live in Bangalore (sidebar: do let me know next time you are here, and want to meet), and i've seen this "correction" already happening. The real estate boom here in the last 4-5 years is pbbly unmatched. And in the last 4-6 months, some of the high-growth pockets of b'lore (Whitefield, Sarjapur road etc) have seen flattening prices / negative growths. While am not an expert - like the ones you met or read about - yet the writing on the wall was quite clear to me. Here's how:

1.No. of borrowers was a fraction of no. of houses bought (after discounting people who buy houses w/o having to take loans - a small percentage in a professionals-majority Bangalore).

2.Interest rates starting moving up about 7-8 months ago.

In other words, individuals/families were investing in more than 1 house (i would say some even 3 houses) at the same time - low interest regime was enough to finance their multiple EMIs.
e.g. Just on Outer ring road/marathalli/whitefield areas, about 13000 buyers bought 27000 apartments (if i remember the numbers correctly).

Obviously, you cannot live in 3 houses at the same time! These were speculative investments, and looked good while the interest-rate party lasted. Now with increasing rates, it's not possible to fund 3 emis..naturally, these start coming into the market, thus reducing the pressure on price.

The fact that no. of buyers was <50% of the no. of apartments should point to a clear case of bubble build-up. That's my way of judging a bubble, (and where there's a bubble, a bust is on its way).
Anonymous said…
Look at the way the prices have gone in real estate all over the country. In Mumbai, for a two bedroom flat even in a suburban area, one has to spend around Rs. 50 lakhs for what was available in Rs. 20 lakhs just 2 years back. How many middle class people can afford it?

With rising interest rates, the burden is much more. Moreover, if stock markets tank (as it is happening now), then that will also have some cooling effect on real estate.

So expect something soon!
Consumer said…
Hi Govind,
SInce you look after the BS website, thought I would mention this interesting play happening. While BS seems to have gone pay with a vengeance, with even one day archives accessible only to paid subscribers, BW in the same period has dropped even registration requirements. While BW is way behind overall, as you would expect,on, their ranking had gone up by 24% in the past three months, while the BS rankings have dropped 23%. Despite being only indicative, I think there is something in those numbers to think about for you.
commonvibes said…
From some great sources it has come to light dat as the stock market has gone down plus the interest rates r so so high property rates r bound to come down in 4-6 months for wait n watch....patience will pay u rich benefits
Kavi said…
govind !

Your articles are insightful ! And they come at right times !

Great guns !
Nileblitz said…

Great blog. Nice post.
I was very naive until a month ago, like a typical NRI, I started looking into the Mumbai real estate market, to own that nice cozy apartment in the city where I was born. I had that stupid NRI mindset and thought that I could just waltz into Mumbai with my swiss francs and buy an apartment in Santacruz, Bandra, Andheri... or atleast Kandivli.

I had a rude awakening when I saw the property prices. A 3 bedroom apartment in Kandivli, priced at 7.2 million INR.

Like every "suspected" bubble, this one is a puzzle. To invest or not to invest. Thats the question.
Anonymous said…
Nice post, I am experiencing the same kind of fall in property prices in and around Delhi.

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