Monday, January 11, 2010

Is it a bubble?

I am spending January visiting at the Indian School of Business in Hyderabad--it is a lovely part of India here, with hills, lakes and a (relatively) mild climate. The atmosphere is at once laid-back and hard working--kind of like California!

So here is the mystery. After talking to people and having students here gather data from web sites, it appears that rents for apartments in Banjara Hills--a nice part of town--go for about Rs 100-120 per year per square foot; they sell for about Rs 10,000. Thus the gross rental yield is about one percent.

Given that mortgage interest rates here are in eights, and that owning property involves expenses, for owning to be a break even proposition implies that rents (and values) need to increase by at least 10 percent per year forever. This suggests a bubble.

Yet typical loan-to-value ratios here are low, and many buyers purchase with cash only. As best as I can tell, people don't flip property here, in part because the stamp (transfer) tax at ten percent is very high. So the characteristics of a bubble--lots of leverage and flipping--don't seem to be present here.

Some people here have suggested that real estate here benefits from "black money"--income that is unreported so as to evade taxes. Those who have such money park it in real estate--they buy at an "official" transactions price that is well below the actual price. But it seems to me that the minimum reasonable dividend yield here is 4-5 percent (there might be a lot of growth for while), which implies values should be about one-quarter of what they actually are. That is an awfully big black money premium.

3 comments:

icedtea1954 said...

The situation in India today sounds like Japan during its bubble in the late 1980's/early 1990's. Property turnover rates were low, and down payments were high (at least for privately-owned houses and condos). But the perception of guaranteed future wealth (plus the status associated with being a property owner) combined to push prices up and up.

AVK said...

The comparison to Japan is inaccurate because of the demographics of India, population growth, and the sheer volume of Indians being pulled out of poverty every day. This is an extraordinary phenomenon, perhaps replicated only by China.
There is a sense of optimism in India, the zeitgeist has changed from what it was 10 years ago. Difficult to capture, but I think this fact alone accounts for some of the premium that Dr. Green talks about.

private villas bali said...

I don't agree with icedta. India has both high property turnover rate as well as down payment. Even you can find the place with law down payment but law property rate at India is impossible to find.