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Housing Prices Do Show Signs of a Bubble

In the post-policy press conference, Dr. Subbarao, Big Boss of the RBI, made this innocuous statement:

Shishir Shindekar: Sir the housing price index is continuously growing, so do you feel any problem regarding the housing price bubble or like that?

Dr. D. Subbarao: No there is no bubble. Housing price index is showing an increase and we have reported that in our document that came out on Thursday. The monetary and macroeconomic development document which shows the housing price index, I think in 9 cities of the country and there is no bubble building up there. Okay, thank you let us move on.

I don’t know how you define the word “Bubble” but you have to see the following statistics in their own report. The India-wide House Price Index (HPI) – which uses registration data from local state governments to determine price rises, starting from March 2009, quarterly – is depicted below.
Indian Housing Price Index

This shows you how prices have been going up. At a CAGR of 26% since March 2009, prices are growing way too fast.

Remember, the RBI had been worried about house price inflation as far as March 2011, when average growth was way below the current number.

There are really six stages of a real estate cycle:

  • Buildup: Prices increase, transactions increase – there’s a bubble building up.
  • Euphoria: (This occurs in big bubbles only) Price skyrocket and transaction numbers also go up.
  • Consolidate: Prices keep increasing while transactions go down. This is when there are few buyers at higher rates but sellers refuse to reduce prices.
  • Early Fall: Prices fall a little bit and transactions pick up (year on year). After deep fall in transaction numbers, hungry buyers waltz in, hoping they’ve picked the bottom.
  • Illiquidity: Prices fall, transactions fall – no one wants to buy, for multiple reasons, and sellers are willing to wait for a long time.
  • Despair: (Only Sometimes) Sellers offload in despair. This has not happened since 1998, so no one thinks this is possible because they became analysts after that time.


But each city is on its own trip, and let’s look at cities individually, with what little data is actually released.

Mumbai and Delhi Housing Price Index

There is no stopping Mumbai. With prices growing at 30% and positive price action all the way back, and transaction growth steady at 27%, it looks like the bubble’s just heating up. But note that because of a massive 44% drop in 2011 in transactions, the recovery has still not been complete – in fact, the transaction index is still at 96.3 when it was 100 in March 2009, meaning that there were lesser transactions now than in March 2009, and prices are up about 2.5x since. This may still be the consolidation phase.

Delhi seems to be in trouble. With prices up 47% from a year back and 250% from March 2009, you would expect heated activity. But transaction volumes are falling and falling fast at –35% last quarter. From anecdotal data, it seems like transactions have shifted into the pre-registration stage – where you pay the builder to build a house, but you don’t actually register the property as it’s not ready yet. Still, the –35% is a cause for worry, and it’s at the end of what seems to be the consolidation.

Bangalore and Chennai Housing Price Index

Bangalore is in the initial down-phase. Transaction volumes have been coming down substantially even as prices have been increasing from Dec-11 to Sep-12. Now, price increases are down to 1%, while transaction volumes have picked up. This has happened earlier – in 2010. The economic recovery since then has ensured prices picked up too. But then, we were still growing at 8%+. Now, we’re at 4.5% and slowing – will prices go hugely negative? Bangalore remains in Early Fall.

Chennai seems to be in the Delhi-stage – prices are up 24%, but transaction volumes down nearly 40%. Again, this is a huge problem area for people lending to real estate – especially to speculators. Early Fall stage.

But these seem to be mellow – both Bangalore and Chennai have relatively low compounded annualized growth since 2009 – just 11%.

Kolkata and Lucknow Housing Price Index

Kolkata and Lucknow seem to again be in the Early Fall stage, of rising prices and falling transaction numbers. Kolkata, like Delhi, is further down in the cycle with three consecutive quarters of such moves (increases in price, lower number of transactions). These remain in the consolidation phase, with Kolkata likely to crumble earlier.

Jaipur and Ahmedabad Housing Price Index

Jaipur seems to be doing okay – prices are up only 10% and transactions are up 60% over the previous year. It’s still building up.

Ahmedabad might be in the early fall stage, with prices having gone up nearly 40% last year, but that’s come down to 9% in the December quarter. Expectedly transactions were down last year, and are up relatively now.

Kanpur Housing Price Index

Kanpur seems like it’s going through Despair. Prices are down 16% while transactions are up.

While India as a composite country is not at a bubble stage right now, it’s important to note that various bubbles are building up in individual cities. If any of these bubbles worsens, then it is likely that other cities will follow. There are no un-correlated prices in a crisis.

Also note that much of this analysis could be flawed in that it takes only registered values, not the “Black” component of home prices. But banks give loans only on the registered values, not the black component, so the impact of a slide will be known only when the slide is deeper than, say, 30% (which might take out the black portion).

I think the RBI governor doesn’t think there is a bubble overall. But looking at the data closely, these bubbles need to be monitored. Specifically, banks and RE companies might want to reduce their exposure to bubbly areas.

Non-durable and high-end Retailers would do well to avoid expansion into areas where prices are falling. When home prices fall, it generally causes people to cut out discretionary spending initially, even though it is irrational.

Lastly, as investors, it’s important to note where prices might be falling, and the pace at which they fall. Avenues for participation, both on the downside and the upside, might become evident. Bubbles are normal part of price cycles, in real estate they take longer to get visible, that’s all.

  • sandeep says:

    Official figures and prices may not give the true picture. Also its the black money (which the politicians, bureaucrats and the babas are amassing at a rapid pace) which keeps the prices from falling. The rate of bribes (or unofficial partnership of politicians- that also on the revenue not on profits- in every lucrative business of the land like Healthcare , Education, Hospitability, etc etc) has gone up exhorbitantly in last few years. When even peons in the government departments are raided it reveals property worth 50 Crores- 100 Crores so you can imagine the assets of senior officers and thousands of corporators, legislators, ministers across the country and where this regular daily cash flow is invested.

  • Sandeep says:

    Can you capture Pune too in this analysis?

  • lohit says:

    The equivalent of P/E for housing – the price/rent ratios do suggest a bubble, esp in Delhi and Mumbai. The anecdotal evidence that I have (from friends and relatives) show a rental yield as low as 2% in many places in these cities.
    When interest rates are running at 9%, anyone investing in Real estate now is simply asking for trouble.
    Another sign of bubble is speculation for capital gains. Many home owners do not even rent out their homes, because the gains were easy to be had.
    The fact that rents have mostly tracked inflation, but prices have gone up at 18-20% itself is probably the clearest sign.
    All bubbles throughout history have had some justification or the other which eventually was proved wrong. Check the Canada/Australia housing bubble blogs – There the reasons stated are Overseas chinese buyers with black money, home hungry immigrants population, government interference, etc. etc. Our reasons are – black money, NRI money, population, builder-politico-bureaucrat mafia, etc etc, i.e. pretty much the same as in the other countries 🙂
    But as always ‘This time is not different’. It never is. If you do not believe me then see –
    Home prices here too will revert to mean. Whether that happens through stagnation till incomes and rents catchup, or through an outright fall in prices remains to be seen. After the exuberance of 2003-2007, Equities are now going through an indifference or revulsion phase. Gold and housing will follow.

  • Mehul says:

    As always, excellent analysis from whatever data available. My small bits, coming from RE background:
    A large part of RE market (Now in all the cities tracked by HPI, and plus few more) is investor driven i.e. non-end-users. This is a limitation to data capturing as largely these transactions to not get registered -in some cases, till the real end-user occupies the property. As with all unorganized investment vehicles, this phase -where developers collect money (sometimes, book xx square feet at yy rate, as even flat layouts are also not ready by that time) in pre-const phase till the end-user eventually buys the flat from investor and get it registered, is extremely sentiment driven. It may appear to be inelastic phase (as we have not seen any substantial correction / panic in memorable past) but if any panic sets in, investors are the first one to cash out. This happens in micro markets where triggers are often localized issues. Its akin to panic selling in equity shares. If triggers are relatively macro, this investor panic continues, cashed out fund get diverted to other assets and inventory piles up. Remember, however, that this is a game between developers, brokers and investors. End-user as well as govt (to capture HPI data) are not in the picture. What gets trickled to end-user market is a fraction of panic price reduction which sometimes is enough to bring some real end-users.
    There are two distinct markets -for investors and for end-users. The kind of control over price an investor gets to wield on developer, the end-user can only dream of. In my view, the whole demand-supply economics is defunct in case of RE due to this strong and sizable presence of investors. So affordable price, customer-centric product design, etc. are all only jargon.
    What RE developer really worry about is the market sentiment as perceived by investors. In case of real drying up of positive sentiments, these folks can stay away from investing for years (again, has happened in past but not in memorable past). It takes the whole cycle to turn. Mumbai saw some fully constructed building lie vacant for several years.
    However, many things have changed since the post Harshad Mehta phase. A helluva lot of cash is buried in RE projects which keeps propping up the market. Realization of land value has found its way in RE assets. Even at its seemingly peak, RE sector is favorite for all sorta people with cash loads. So, in a way, even investors are now tied in to their investments and do not have many avenues to run to.
    In such a scenario, hoping for RE prices to become end-user market driven (rational) can be a long frustrating wait. Even time correction may not happen. What can and is happening is more and more people are migrating out of un-affordable metros. Mumbai’s population growth rate was ‘only’ 8% last decade -a far cry from 23% she experienced.
    Oh, this turned out to be an essay (without making in point). The question I ask myself many a times are: Why should we expect RE prices to be rational and demand driven? Do we not pay mind-boggling PE multiples for shares? Isn’t it another cyclical market? Sure its a market which is criminally skewed to the manufacturer (developer) and it produces one of the three basic essentials. And for that it needs fair trade practices, a regulator and strict quality regulations. But for prices?
    P.S.: I stay in a rented flat for several years in Mumbai. Mainly because I can not accept paying 10% interest on a large sum required to buy a flat -legal status of which I will probably never be able to ascertain despite being from the same sector. May be because of it.

  • prasun says:

    What happened in 1998? I tried to google it but got nothing

  • So I bought an allotment from a investor last year. This is on Noida expressway.
    Here is what I found:
    1. Investors are of two types. People whose business is real estate investments and people who park their surplus money into real estate.
    2. Both of them of them invest in the good apartments the moment bookings open in a new project. So all east facing, corner flats etc. get sold before you and I get a chance to count our savings.
    3. Investor 1 needs to circulate properties because his livelihood depends on it. In case of a stuck project (where prices don’t increase) they stand to lose money because they never counted on making any payment beyond the booking amount.
    4. Investor 2 (for e.g. a small north delhi hotelier/guest house runner) generates enough surplus cash to keep making payments, knowing that prices will eventually improve. Hence even in a slow down he has no need to sell
    5. People who are actual residents only buy what they can afford. In case of a drop of price they will continue to pay for the apartment they booked.
    a) The case where demand slows down will have an effect to the extent of %age of flats held by investor 1.
    b) Where economy shrinks jobs and people can’t afford to pay EMIs is the second situation where both investor 1, the retail buyer and even probably investor 2 maybe affected.
    Currently even as transactions are falling prices are rising. It is a bubble that is not pricking. A lack of regulatory framework has ensured that real estate is the parking lot of black money. This is causing retail buyers to suffer. This “may” effect any new projects launched. But beyond that till the economy really puts a squeeze on, the bubble should continue to stretch fueled by more black money.

  • Anil Kumar Tulsiram says:

    Excellent analysis Deepak….
    I am a firm believer that real estate is already in bubble stage or if not bubble stage atleast out of reach of most of the middle class too…. But the consensus seems to be real estate prices cannot fall because of black money. Market will simply become illiquid as unlike US, here people are not leveraged and has capacity to hold it for extended period of time. Only time will tell….

  • fubar says:

    My only worry is that real estate is becoming a dangerous single point of failure in India. As and when it turns down, it will kill the major boom that we see today called India consumption story and every sector be it Cement, Steel, Autos, FMCG will be badly hurt. It is stupid of the govt. to let the risk of a single point failure increase day by day. They should try something to deflate RE slowly. A huge crash will be too big a setback for the economy which will take years to recover from as we have seen in the western world.

  • Sanjay says:

    This was very pragmatic comment : Market will simply become illiquid as unlike US, here people are not leveraged and has capacity to hold it for extended period of time.
    So in short, there might be a time correction for coming decade. RBI has done a good job to make sure that buyer has his own skin in the game.
    Btw, Deepak, you can torture statistics to say anything out of it. It would have been interesting if the same graph would have been plotted starting from March 2007 instead of March 2010.

    • Sanjay – while the capacity has always been there, we have seen dips of more than 50% in the past.
      The graph didn’t exist in 2007 because this particular index has been there only from march 2009. (and there *was* a price correction in Blr and Hyd at least)

  • Krish says:

    Hardly one would see an article with real data. This one is exception and interesting. We have seen enough write up about the black money and next between netas, babus, babas and bankers. However am seeing new trend in the last couple of years. Today we have more than two dozens of RE companies listed on NSE/BSE and scores of other small companies which attracted private equity.
    Suddenly we started to see clear data on new units being added, forecast of space development and revenues and so on. Definitely a sign of organized platform which was not there earlier. This RE organized sector (DLF, Unitech, Godrej, Sobha etc..) is able to develop projects in a planned and phased manner without any worries of cash flows and demand & supply. It even developed rapport with banks to extend loans for the customers. The other day I was speaking with top honcho of banking industry and there was a mention that much of the banking liquidity is sucked up for new launches.
    In nutshell, builders have developed brand and funding from banks had become easy for them and their customers especially for the pipeline projects. However the losers are end customers. The willingness to loan for resale properties is not as much as for new properties. Once bought, customers may not be able to sell their properties after living in it for some time. In a changed scenario, the real estate for self consumption looks alright but I doubt it as investment vehicle.

  • Varun says:

    Please share the source of data in your post.

  • Murty says:

    Every one is an expert now…… Probably by their own experience!

  • Vivek says:

    Limit Sec 54F exemption to certain amount or block of years then see the result.

  • Anshul says:

    Excellent article Deepak. But I agree, black component has not been captured in these datas. I personally know lots of property prices in majority of the localities of Kanpur and everything has increased by 40-60% in last 3 years. Surely, the data hasn’t captured the cash component 🙂

    • It probably hasnt 🙂 But then RBI doesn’t really care about the cash component I guess, since that’snot affecting the banking system. However even for registered prices to go down 16 yoy must be quite strange, no?

  • Amit Prabhu says:

    Deepak, you have a knack to pick the right topics. Reading the first paragraph, I was reminded of the denial that Greenspan and his team lived in till it got too late. I hope we are not headed in that direction.

    • I don’t think it’s this bad right now, and I think he was trying to shoo the caller away (he had already asked two questions). But it would indeed be strange to ignore the building up of prices as it’s visible…

  • sv says:

    Very Nice article.
    I had sold my apartment in Mumbai last month. I published the property in most of the websites and carefully filtered the responses. I selected 5 genuine buyers out of almost 3000 emails. I found that the genuine buyers were willing to pay on average 15% less that the highest price orally being quoted by various estate agents. It was very interesting to note that the quotes from genuine buyers were varying just by 5%. From this small experiment my view is that there will be a small correction in Mumbai of upto 15%.

  • chinmay says:

    Can you provide link to the report?

  • Manoj Nagpal says:

    Hi Deepak:
    I pose my question to you using an example. The HPI is published quarterly. So say for eg: in Jan-Mar quarter there are a lot of transactions in Lower Parel (maybe due to demand or new launch or whatever reason). Lower Parel in Mumbai quotes at around 20k to 35k. So the average price for Mumbai in that quarter will be say around 15k (hypothetical)
    The next quarter sees a lot of transactions in say Mira Road where the average price may be around 5000k. So this will drive down the average price for Mumbai for that quarter to 13500k.
    So the index may reflect a 10% dip QoQ. Actually no prices may have changed for either Lower Parel or Mira Road. Only where the txns occured may be different. Is this kind of anomaly taken care of in HPI?

  • Uma says:

    Excellent analysis. Everybody is watching prices, but transaction volumes hold the key as you have rightly revealed.

  • Uma says:

    Is this a good time/ price to invest in gold and silver? What is your view on each?

  • Avinash says:

    I have been gleaning to find out ‘some’ clean data knowing that whole of it doesn’t exist(?)in our country. This gives an overall view by city , and kudos to you for bringing that out Deepak. I understand the purpose is to sound an alarm/wakeup call, however my view is that while this is good but it is data by specific location (eg, Noida extension, Xway, Dwarka expressway, New gurgaon) is what will be more useful to people for them to act.Otherwise, my guess is that people tend to think that their project/location is not affected. Can some one please point to a credible source of data, I haven’t been able to get it.
    The question I also have is how is the data on price fall arrived at?
    Some of analysis I liked was …, post 98 analysts, ‘capacity to hold being always there and yet prices fell by 50%’, and ‘even registered prices falling’. Many thanks Deepak and please cover this further!
    ps- I need to sell…if I find a buyer.

  • Leo says:

    Why dont u compare this with Money supply
    according to my calculation 18% cagr from 1990s when hdfc began post greenspan era

  • Rama Sethia says:

    No doubt, an excellent analysis by Deepak. However, if you look at the Banaglore RE situation, there is not a single 3BHK property from a reputed builder in less than a 1Cr budget. The pricess has doubled in last two years (mostly in last 6-8 months). Who is putting so much of money in to RE? A S/W engineer can’t afford a EMI of 1L/month. Is this time to watch or buy ?

  • Leo says:

    To me the banking system is the real problem.We have to go to full reserve banking .Fractional reserve banking is a disaster.It is the cause of all problems .If someone thinks otherwise here please do an article and we can discuss.Real estate in india is non stop printing of paper money at exponential growth and not the function of so called urbanisation and consumption.

  • Rama says:

    Even state governments are party in creating the price bubble. In Patna the present government of Nitish Kumar revises and increases the Minimum Registry Value of flats and plots every year.
    The real estate agents and property sellers often cite reference of the Minimum Registry Value of Government of Bihar and ask for price according to the government assessment.
    This idea may sound flawless to many but you would be amazed to know that there are residential plots in Patna located in cobweb of lanes which are barely 3 ft. wide. yet they qualify for the rate of 10K to 15 K per square ft.
    Nitish Kumar and his cronies often cite the rising prices of property as sign of progress in Bihar. Prices are rising but they have no explanation for the numerous stalled projects and proliferation of illegal colonies established by land mafia. In these illegal colonies the price of plot or flat is barely one fourth of the market price fixed by the government.
    The Big Bubble of real estate is present everywhere even t3 towns are not spared.

  • Saurabh Gupta says:

    Highly informative article! Congratulations.
    I will love to see an updated analysis based on current prices and transaction volumes and see where we have come from March and what the road looks like in the future. I am NRI and exploring real estate investment opportunities in some of the cities you covered.
    Based on my own findings, I have seen the market soften a lot in Delhi-Chandigarh-Panchkula area since late last year with the prices actually down. But high growth “IT” cities like Pune and Bangalore continue to baffle me. Price increases just do not seem to slow down!
    Look forward to an updated analysis.
    Saurabh Gupta