Tuesday, April 20, 2010

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:


200120022003200420052006200720082009H1
Delhi100106129150201269298379361
Bengaluru100133170224275272313233181
Mumbai100116132149178224268307332
Bhopal100120136154179192260377361
Kolkata100115129148172180237301377
Cost Inflation Index100105110115118122128136144






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  
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