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Tuesday, February 12, 2008

Pune Real Estate Prices

India has seen great boom in stock market as well as real estate. Pune's real estate prices have gone up significantly in past one year. Rates in some areas are quoted more than double of what it was one year back.

Property which was being sold at INR 1000 psf ( per square feet) eighteen months back is now being quoted at INR 3000 psf.

In my opinion all this rate hike is not natural. Builders have really made their hay on shining sun of Couples Working in IT (herinafter referred to as CWIT). For saving taxes CWIT have really gone behind property booking at the price demanded by builders.

This gave clue to investors who have spotted this trend and started investing heavily. Builders started promising assured returns on investment if investors booked their properties. Many people started booking and as a result all the builders got the required funds so that they could arrogantly refus lower offers.

CWIT who already had home decided to invest in second home assuming that this arrogance means there is great demand and prices will definetely shoot further....

How long can this story continue....

  1. Till the time investors keep getting good returns
  2. Till the time all CWITs have booked their second home
  3. Till the time builders have holding power
  4. Till the time people are OVER OPTIMISTIC about the economic growth

All CWITs felt that they can easily rent their second home and manage their monthly commitemnts and in a way it is very true if we consider Home loan to be short term investment, but repaying EMI for more than 10 years and that too for two homes seems to be too big a risk.

Now look at the returns people are getting by investing today.....

Property costs at Wakad and nearby areas are around INR 3000 psf and rate of interest per month on this is around one percent. So interest on psf of property is INR 30.

Now the going rate for rent in this area is around INR 6- 8 psf and you are never assured of 12 months occupancy. We will have to assume 5 % time the property remains vacant. But we can ignore it at this moment.

Now the investor or CWIT ends up paying INR 22-24 psf for his property in terms of interest. This comes to around 9 % per annum.

For the investment to reamain profitable the property prices should keep growing at steady rate of 9 % per annum to keep the investments financially viable.

Besides the economy also should be booming at the same rate so that people can afford paying the rents at this rate.

Recently I saw people finding it difficult to rent the property at INR 8 psf. With more property coming out in market the rates will be dropping to level of INR 5 psf.

As soon as we hit this level all the investors will start exiting of the market creating negative demand pulling the property prices down.....

Also people who already have first home and are salaried should weigh down all the risks before going for second home. When the propety market starts melting down, actually capitalists are ones who can easily sell their property as they are full time investors, they can spend time sensing the pulse of market and exit at right time.

Now imagine what happens to the property which has depreciated rather than appreciating and you are paying more interest than the rent you are earning !!

And please do not argue that property prices never in past we have seen such meltdown... people should know that in 1995 Mumbai property market collapsed by 50 % and at Pune , Aundh area , property prices fell down more than 40 % after Y2K and DOT com burst.

Also people should not forget the subprime market collapse at US. Arguing that Indian economy fundamentals are very strong is alright, but three years back did any one have question marks on US economy ?

Also not to forget the recent front page article in many business newspaper about 10 - 15 % drop in the property prices at Bangalore, Hyderabad & Gurgaon.....if this can happen in booming economy of India , imagine what will happen if there is economic slow down......

I am not being pessimistic about economic growth of India , but I am just apprising people of risks involved. I would be glad if all goes very well......


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