User talk:Simmash
Housing bubble in India 2012!! I need not elaborate anything on what happened to the housing bubble worldwide. In India however till now the prices of house have shown a little fall, cases of stagnation in few or in some cases slow and very little growth. The point that intrigues is, is this a housing bubble in forming? What is going to happen to housing price in 2012?
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Looking at from the simple angle of the inflation; in reality the prices of the houses have gone up roughly 3 times (or even more in several cases) in last 8 yrs (2003 to 2011). The sample shown on the right, Table 1, for analysis is actual data from a big reputed construction company who has been making a huge complex with more than 2000 apartment located within 8km from center of Bangalore and has been selling apartment in the same complex since 1999. With the pricing increase shown in the Table 1 on the right this company was able to sell of 95% of their property by 2011. Hence this is the most suitable data that can be taken for further analysis. But let us put the price under bigger lens with respect to the inflation. To be more specific let us consider the changes in price of an apartment in one of the metro, say, Bangalore, in which the new apartments are in abundance and in huge supply. We see that every nook and corner of this metro is experiencing a mushroom growth and it is happening is all direction of Bangalore. Between 2003 and 2011 taking into account the inflation, the price of a property purchased for say Rs1246/sqft in 2003, from the Table 2 bellow, should roughly cost Rs2146/sqft in 2011. But most of the property has been hovering around at a *minimum of Rs3800/sqft. Many other properties are in fact 10-20% higher than the price quoted here but these prices are not based on ground reality and such builders are not able to sell easily. Question is how much is the bubble based on inflation? It is easy to do the calculation, and see that the bubble is almost in the range of 77%!! ((3800-2146)/2146) * 100 = 77%
But the figure above may not show the correct value as the price does not only depend upon inflation alone but also on increase in earning power. So let us look at how earning went up in the same period. The simplest variable is the average salary hike in a country which is governed by its economic growth. Every person employed gets an annual hike in the salary based upon economic conditions and growth and hence his earning increases year after year. So the purchasing power goes up. This should be probably a good way of looking at the price rise of commodity especially housing. Assuming that as the salary goes up, people are willing to pay higher price provided that demand and supply is maintained and do not change drastically. Taking the average salary hike in each year, a salary of Rs1200 in start of 2003 would be become Rs3688/- by end of 2011. With inflation not taking into account the salary looks to have become 3 times. (Table 3) Does this means that the home price increase from 2003 to 2011 which is 3 times is justified if we compare against the salary increase which is 3 times from 2003 to 2011 in India? The answer is no. And here is the trick, the salary increase is not given increase/hike as it has to be adjusted for the average annual inflation, then only the real purchasing power of salary can be seen. After adjusting the salary increase to inflation the picture looks quite different and also very interesting and conclusive. We see that after adjusting the salary increase for average annual inflation the effective earning has gone up only ~1.5 times from 2003 to 2011. In fact from the Table 4 we can see in years particularly 2009 and 2010 though there was an increase in salary but since the inflation was more than the average hike, and the inflation adjusted salary hike is actually negative or negligible and hence the purchasing power actually went down for people employed on salary. So if we extrapolate this for the population in general, we can say that the purchasing power of people has gone up by 1.5 times (=2015/1304). Hence the inflation adjusted price of apartment in Table 2 which is Rs2146/sqft should be 1.5 times = Rs3200/sqft at best. This gives us the right bubble in Indian property. So if the exiting property is being sold at Rs3800/sqft we can say it is due for correction of about ((3800-3200)*100)/3800 = 16% at current rate. A housing bubble of 16%!! Another way of looking at bubble is value gap between potential earning power of amount invested in a house and the actual rental value it gets. In 2003 a 1000sqft apartment would cost 12lac at the rate prevailing in that year (Table 1). The bank interest was 10% pa (per annum) and hence if this amount 12lac was deposited in bank it would have fetched 1.2lac pa and hence the opportunity cost is 1.2lac. The rent of a 1000sqft apartment in 2003 was around 8K pm (per month) or 0.96K pa. Hence the value gap was (Opportunity cost – Actual rent)/ (Opportunity cost) = 20%. In 2012 a 1000sqft apartment now will now cost 38lac at current rate (Table 1). If the interest rate today is say 9% pa the opportunity cost is 3.42lac pa. As per going rate the current rental value of a 1000sqft apartment is 14K pm or 1.68lac pa. Hence the value gap now increased to 50%. Let us see the ideal case, keeping the value gap same (20%) as it was in 2003, at the current rental rate, let us do a backward calculation. For a current rent of 1.68lac pa, with the gap of 20% the value comes to (1.2*1.68) = 2lac. Taking this as opportunity cost at 9%, the expected investment comes to (2/0.09) = 22lac. Hence a 1000sqft apartment rate should be 2200/sqft. This figure is very close to price of apartment with inflation taken into consideration as given in Table 2. As per this consideration the current bubble is ((3800-2200)/3800) = 42%!! I am sure there are several other factors that impacts earning, purchasing power and GDP growth of a country but taking all these factors become complicated and make it extremely difficult to visualize the calculation of what should be actual price of a property. I have tried presenting here a very simple calculation taking into account the factors that is directly in front of us to show that there is a housing bubble at a very conservative figure of at least 16% and can be as high as 42%. This shows that further price rise will have strong resistance, and the prices may be due for a correction. The time however depends upon when the right circumstances come together due to prevailing economic condition in the world.
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