Thursday, 26 July 2012

Kerala real estate bubble or boom? An exploration of truth behind the possibility of a bubble in Kochi

The rapid growth of the housing market in India and especially Kerala in the recent years has raised concerns about its sustainability and implications for financial and macroeconomic stability. As prices continue to spiral out of control in the Kerala property market, many an aspiring customer is beginning to wonder if this is a real estate trend or is it a bubble that is waiting to burst? The Nandanam Consultants team explores the nuances of this growth and we try and draw conclusions based on available information.

Short video clip (Hindi) on possible real estate bubble in India

The bursting of asset bubbles in the housing market has often been associated with severe economic crises, especially, recessions caused by sharp reduction in spending as a result of loss in the consumers’ power to leverage against capital gains. The OECD Economic Outlook uses two approaches to evaluating housing price bubbles. One is price-to rent ratio and the second is the user cost of housing. One of the most significant factor that drove the growth of housing market in India in the recent years was the easy availability of bank finance at affordable interest rates. As per RBI, the retail loan portfolios of banks including housing and real estate advances expanded at rates ranging between 22-41 per cent in the last decade. The RBI has also tightened the grip on investments by asking banks only to lend 80% thereby reducing scope of a bubble formation.


For Kochi and Kerala, the user cost of housing has gone up significantly over the last decade or so. As per the Residex which tracks residential property prices in Kochi and other cities, key indicators emerge:

1. The property market in Kochi corrected by 15% from 2008 to 2009 due to global recession.
2. The market bottomed out towards end of 2009, further falling by 12%. So in net the market fell by 27% over the period of 2008 - end of 2009
3. The year 2010 - mid 2011 saw property prices climb by 35% in Kochi
4. The property market tanks and falls by 32% is last three quarters in Kochi.


The growth recorded in point 3 above was not unique to Kochi. Chennai, Lucknow, Faridabad, Patna, Mumbai, Bangalore and Delhi also recorded significant property appreciation. Much of it was due to the flow of capital post recession and positive sentiments about the India economy and GDP growth. Speculative investments by customers and NRIs were at its heights and people felt there was no looking back. From the developers point of view, they wanted to cash in on the lows of 2009 and sell off most of their inventory at record profits - resulting in higher prices every quarter. 

Post mid 2011, no city in India, has recorded as significant a correction in property prices as Kochi. Clearly indicative of the fact that the price increase was a bit too much, a bit too soon in 2010 - 2011. As per CREDAI " A lot of excess inventory was created which did not sell off. Developers were announcing ten projects a month during that period. "

Key Ratios to consider

(1) Price-to-rent has been on a rising trend since 2003. So although prices have been increasing rents in Kochi have not kept pace. (2) House price to household disposable income also don't have a correlation as although disposable incomes have increased prices have run too fast.

In summary, the information available at our disposal for Kochi clearly points to a speculative real estate bubble which was created. However, in the back drop, the market has also corrected significantly over the last year with the real housing demand coming into picture today. The bubble which was created was predominantly in the luxury segment since most of it was speculative investment by NRIs, but it was not much in the budget segment.

To conclude, although ratios (1) and (2) above appear to be true, the prevailing correction in Kochi, gives hope that prices would stabilize. If they don't and prices continue to rise we could be in for an asset bubble break down in a year or two. If not we could be in for a stable future. But that would be talking too soon.

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