India's housing bubble

Is India going to follow the western nations in building a housing bubble? I fear yes. Take a look at how distorted the market really is. Prices are really high, with the yield from the rentals really low.

Yesterday, i was in Delhi. My friend who is living in a rented house at Safdarjung Enclave area told me that he is paying a rent of Rs. 30,000/- per month. The house is a three storied one build on a plot of 200 yards. With some area left for the front lawn the covered area on each floor is probably about 150 yards or 1500 sq feet approx. According to him each floor would sell for about Rs. 2 crore. From what i know about property prices in Delhi, he is not far off the mark. So lets do some simple calculations.

The rent would be a mere Rs. 3,60,000/- per year. On an investment of Rs. 2 cr. the rent yield works out to be a mere 1.8%. Now why would anybody buy a flat for Rs. 2 crore for putting it on rent? Well the answer is obvious, it is not rent but property appreciation that would prompt such buys. The stark difference in the rentals and the property prices point to this fact. The rentals not having kept pace with the rise in property prices point to the fact that the demand for residential accommodation is not as much as being projected. The speculative demand can keep property prices high and keep them going higher, a sign of a bubble building up.

In the short term, the argument on demographics of the country and hence thus the likely rise of housing prices may work. How long will prices keep rising? I have no idea. It may be a week, a year, a decade or much much longer. But the crash will come. Probably it will not hurt us but our children. We need to be prepared and prepare our children for it.