Property bubble bursts as prices crash 20% in investor-driven markets

Real estate prices in investor-driven markets such as UP’s Noida, Navi Mumbai, Ludhiana, Chandigarh andGurgaon’s Dwarka Manesar Expressway have seen more than 10 percent pricecorrection due to all-around liquidity squeeze, dearth of buyers and erosion of investor faith in the property market.

In areas like Ulwe outside Mumbai where massive housing projects are coming up or already constructed, prices have remained flat as apartments here are unsold or have been bought by investors hoping to flip it for easy profit. The same is true for highly speculative markets such as Noida and Ludhiana too where there is a dearth of genuine buyers and investors are looking to exit from projects.

Today’s Economic Times notes that the first signs of a bubble bursting in this investor market are finally here as a 1,100 sq ft apartment in Noida Extension that cost around Rs 42 lakh a few months ago can today be bought for around Rs 37 lakh, while a 1,200 sq ft apartment can be had for Rs 77 lakh compared with Rs 86 lakh six months ago near Gurgaon’s Dwarka Manesar Express.

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Quoting property agents in Gurgaon and Delhi, the report saysbuilders today are willing to throw in 10 percent discount. With a little bit of push, they are even offering get 5-6% worth of freebies such as free furniture or ACs, free parking or top-notch flooring etc in these investor-driven markets.

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Apart from investor markets, property prices have plunged across 22 major cities, including Mumbai, Delhi, Bangalore, Chennai and Pune during the April-June quarter as developers battle with low sales and high inventory.

The National Housing Bank’s Residex tracks movement in prices of residential properties on a quarterly basis. According to the index, during the period between April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall in prices.

" Investor-driven markets, especially in North India, are seeing a 20 percent correction in secondary sales as there is complete panic here since these apartments are not habitable. Developed areas, on the other hand, are seeing a price correction of around 10 percent in terms of discounts and freebies,“said Pankaj Kapoor, MD at real estate research firm Liasas Foras.

As Firstpost noted earlier, residential property in Kochi declined by 3.37%, Patna-3.29%, Coimbatore 3.26%, Ahmedabad 3.13%, Faridabad 2.42%, Chennai 2.26%, Jaipur 1.79%, Delhi 1.49% and Bhopal 1.30% during the June quarter.

And if you were to look at the sales figures, the reality is even more grim.

Data from property research firm Liasas Foras shows Mumbai saw the maximum inventory of unsold homes at 155.27 million square feet or 48 months of unsold inventory during the first quarter of FY14.For NCR, the inventory has more than doubled to 31 months in the first quarter of FY14, while for Mumbai it has risen from 17 months to 40 months.

Inventory denotes the number of months required to clear the stock at the existing absorption rate.

An ideal scenario implies inventory should be in the range of eight to 10 months. But Mumbai would take four years to sell these homes despite a slew of discount schemes, new launches and back-room negotiations.

Even Cushman & Wakefield suggests that more than 30% of houses under construction in Mumbai are priced at more than Rs 1 crore.

“The quarter April-June was subuded for the real estate market and possibly one of the worst quarters in terms of sales across cities. A combination of discounts and flexible pricing is keeping up the sales in the past few months,” noted Pankaj Kapoor of Liases Foras.

Clearly an artificial price rise has been created to accommodate investors at each stage of construction, which is no longer sustainable. Oversupply and overpricing have reached a point that has made it inevitable for the prices to soften.

“More than 40 percent of the buyers in Mumbai’s property market are investors. Noida is even worse and akin to a ghost town. Today, all investors are are looking to cash out as more appreciation is just not possible. But their money is stuck since there are no genuine buyers at this price point and the rupee has tanked to 65 against the dollar from 43-45 when these investments were made,” an industry veteran told Firstpost on condition of anonymity.

In other words, with a depreciating rupee and high inflation,the cost of money has gone up and the chances of making money in the short-term are not very bright, which is why investors are no longer ready to pump in money.

And with 2013 marking the exit of private equity, a distress sale in the real estate industry cannot be ruled out.

Expecting an endgame to speculative real estate prices, Manish Bhandari of Vallum Capital in a recent report titled ‘Valuenomics” says a ’large increase in asset price is followed by a higher demand, as investors think that further increases in prices will follow. This “super-exponential” acceleration in prices due to a positive feedback (or “pro-cyclicality”) leads to formation and then maturation of a bubble, which has happened in case of the Real Estate prices in India.’

He expectsa price correction of more than 40% and thereafter time correction for another four to five years as during this period banks are likely to deleverage their balance sheet, stomped by losses, while investors will shy away from further investments and genuine buyers would emerge to clear excess inventory.

“The previous deleveraging cycle in 1997-2003 saw real estate prices correct by 50 per cent in Mumbai Metro Region. Add to that the likely exit of PE players. ..Unless government deflates the housing bubble in orderly manner; the aftermath and reverberating effect of collapse by market mechanism will surprise a generations on how a nation was making its way to prosperity by speculating on a piece of land and eventually lost a fortune,” adds Bhandari.