Property Bubble Continuing

National Housing Bank (NHB - wholly owned by Reserve Bank of India or RBI) launched RESIDEX on July 10, 2007. The pilot study covered 5 cities namely Delhi, Mumbai, Kolkata, Bengaluru and Bhopal but has now been extended to 15 cities and ultimately will be extended to 63 cities that comes under JNNURM(Jawaharlal Nehru National Urban Renewal Mission). Looking at the dataset provided for 15 cities for the last two years, we can conclude that property bubble in some cities has continued. Cities like Hyderabad, Bengaluru, Jaipur and Kochi has seen a correction in property prices ranging from 10%(Kochi) to 42%(Bengaluru) from peak, while the other cities like Bhopal (39%), Faridabad (36%) and Kolkata (59%) has continued to make higher property prices in the last year. Since the data is already one year old, the prices right now might be already much higher than what is shown in the dataset.


Now compare the figures with the data from Economic Survey 2008-09. If we combine the data available in the economic survey along with that of Residex and compare it with the Cost Inflation Index, we get the following table and charts:

	2001	2002	2003	2004	2005	2006	2007	2008	2009H1
Delhi	100	106	129	150	201	269	298	379	361
Bengaluru	100	133	170	224	275	272	313	233	181
Mumbai	100	116	132	149	178	224	268	307	332
Bhopal	100	120	136	154	179	192	260	377	361
Kolkata	100	115	129	148	172	180	237	301	377
Cost Inflation Index	100	105	110	115	118	122	128	136	144

The first chart shows residential property prices in 5 cities along with cost inflation index. The second chart shows the same prices adjusted for inflation.

Compare these charts with the one available at Calculated Risk for 20-city Case shiller index in the US. Looks pretty similar na? So what can happen? If the CII rises by 30% from here in next three years and house prices decline by average 30% the two will converge. Don't say it can't happen. The prices declined by 30% from an index of 200 to 140 between June 2006 and March 2009 in the United States. The only thing that can trigger a fall is increase in interest rates and the cycle has recently started. Expect a lot of heartburns for people buying real estate right now in the next five years.

Less money has been lost by the great body of investors through paying too high a price for securities of the best regarded enterprises than by trying to secure a larger income or profit from commitments in enterprises of lower grade. - Benjamin Graham