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Monday, January 29, 2007

A Property Bubble in India?

by Edward Hugh: Barcelona

The issue as to whether or not the present rise in property prices in India constitutes a bubble has been getting a lot of coverage in recent days. On the India Economy Blog we had a considerable discussion some weeks back (and the comments really are a very good read).

More recently Indiblogger Debashish Chakrabarty asked me a series of questions about the Indian situation for inclusion in the Hindi blogzine Nirantar (full confession: my hindi isn't really all it should be, so I can't offer any pointers here). Anyway the questions were:

1) Why you disagree that this is a bubble? How do you see the price-war?
2) Do you think that Indian real-estate prices are not pumped up and don't need any correction?
3) Indian Real-Estate doesn't have any regulatory body. Is this the scene worldwide?

To avoid unnecessarily consuming space my answers - for what they are worth - are online in English here.

But the question simply refuses to go away, and in today's FT there is an article about the opinions of Deepak Parekh, chairman of the Indian Housing Development Finance Corporation, who takes the view that a significant market correction may now be looming.

In part one's view of this situation is conditioned by one's expectations for Indian growth potential during the coming years, and in particular much hangs on the issue as to what exactly trend growth is in India at the present time. Both Nanubhai and I have taken quite a strong view on this, and argue that trend growth may in fact be higher - and even far higher - than many (yes, we are talking in particular about the Economist here) imagine. Nanubhai has this fairly impressive post on IEB which explains in some detail just why the Economist and others may well be getting this wrong, and I myself had a crack at the topic here (and here).

So generally I think Deepak Parekh may well be overdoing it, and this view is only reinforced by the kinds of arguments to be found on this post (and this one, and this one). In a nutshell, the whole concept of risk just isn't what it used to be right now. There may be some sort of local correction within the Indian market, but, as I argue in my reply to Debashish's questions, this is hardly likely to derail the Indian economy in any serious way. Anyway, in order to take a second opinion ands to try and get a better purchase on the issue I mailed Envenkat - GEM's Mumbai-based India country specialist - to see what sort of a take he had. The brief note he sent back to me can be found below.

Response to Deepak Parekh, a note from Mumbai

by Envenkat

Yes I did see this view expressed by Mr Deepak Parekh in other media in India. He has been on this theme for many months. I do agree that the economics of affordability has not changed yet. But we maybe seeing the emergence of a new consuming class, and hence views based on the traditional consuming class may seem to be out of sync with the market. I guess what I mean is, the new consumer sees the property price as an Mortgage payment/ EMI not as the capital cost of purchasing the property ! This has already happened in the auto industry, and one can see the top-end models being sold more than the entry-level models. More than 75% of the vehicles are now sold on loans. Comparatively only about 30% of the property is sold on loans. However the ticket size for a car, and its loan duration (usually 3 years) is far different from that of a house (loan tenors of 15 years)

What amazes me is that the industry is going ahead full-blast in building deluxe and super-deluxe properties (as opposed to mass/ affordable housing or integrated townships). When I speak to people in the industry - the investment flows into the sector (at project level and company level) is very high. Construction companies who could have had difficulty in mobilising USD 2 mn a year or so ago, are now raising USD 100+ mn from listings on AIM - London, or private equity funds in India or getting themselves listed on the stock exchanges in India. That would give you an idea of the liquidity flowing into the sector. Yes it would be easy to use the traditional India story hooks - like low penetration of mortgages to GDP, low number of built-up houses to families, demand from the corporate/ IT sector to justify the mobilisation of these funds. The servicing of the equity funds mobilised, is going to be something else.

One sunrise sector - IT, has only now been able to justify its valuations based on the sustained growth (in revenues and profits) over the last 5 years. Retailing and Construction are two others which have shown a lot of promise, but can they show the sustained growth path ? From my experience this is usually one wherein the customer is also happy. And with with the sky-high real-estate prices, and housing purchased on loans, the affordability test is usually when there is a downcycle in the incomes. Nobody is forecasting a slowdown in the GDP growth rates for India. Hence everyone is saying - there is a party going on now, enjoy, we will worry about the hangover when it is nearing midnight ! (or we have to go home !)