Understanding the surge in housing prices in India

I came across this interview of Deepak Parekh, Chairman of HDFC. It has loads of wisdom on housing markets, reforms, indian economy etc.

First and more importantly his view on housing:

I personally feel that the developers have gone totally haywire. They were buying land as if there is no tomorrow. That was a big mistake.
 
RBI prohibited all of us from lending money to buy land. In fact, the RBI directive was repeated – first, it was meant for banks but later (it was) extended to housing finance firms too. It expected the asset bubble. RBI had said that banks can only fund the developers after the projects get the commencement certificate. We followed the RBI norms and most of us are safe today.
 
When we stopped lending, foreign equity flowed in. A host of private equity funds and venture capital funds came to invest in land and they all were promised the moon… phenomenal rates of interest. Most of the transactions were debt transactions from overseas in the garb of equity.
 
They came through the automatic approval route under FDI (foreign direct investment) and money came in quickly as equity deals do not need prior approvals. They are mostly convertible debentures and preference shares, with conditions that before three years they will be redeemed. The developers borrowed money from overseas to fund their land deals at 18-20% interest. The land prices have crashed but they have committed to pay high phenomenal interest rates. Overall, 60% of such deals could be debt and the rest equity, and my estimate is that between $12 billion and $15 billion (Rs53,160-66,450 crore today) has come through the FDI route.
This is superb and explains what has been going on in the housing markets  in India . I have explained in numerous posts (see this) that despite interest rates rise etc, we don’t see any correction in housing markets in Mumbai. The prices continue to rise. Moreover, the developers expect sales to pick up during festivals and prices to rise. The developers have borrowed money for development and only way it can be recovered is by keeping the prices high. They seemed to have forgotten basic economics – when prices go up, demand comes down.
 
Where will the maximum correction come?
 
Is there some more pain coming?
Yes. How will they (developers) pay back? Where is the liquidity? Sales have stopped. Even those financial institutions, who have disbursed money carelessly, will find themselves in trouble as a large number of builders will face difficulty.
 
We need to categorize developers’ investments in various segments — malls, shopping centres, commercial and residential complexes. The malls have been worst-hit and the residential units the least-hit.
 
The advantage with the residential segment is even if the prices come down, there is some demand because of the shortages, but the malls are going abegging and people are converting malls into offices.The maximum pain left is in the retail segment; followed by IT, commercial; and the residential segment.
 
How much pain is left depends on the locality. For instance, in south
Mumbai, there is a shortage and hence prices will not come down drastically as you are not reclaiming more land, increasing FSI and redevelopment is not happening. Where are the new buildings? So, prices cannot go down. But in the suburbs, they can…
 
I worry about Bangalore, Chennai, Hyderabad because supply was ten times last year. The maximum pain left is in the retail segment; followed by IT and commercial segments; and finally residential segment. I’d think that Mumbai will be relatively less affected because of lack of land here.
I never really understood the concept of building so many malls in Mumbai when housing supply itself is short (see my post here). You see malls springing everywhere. I can understand all this consumption buzz but it has been overestimated. Most people visit malls to just enjoy the cool AC, eat food in the food courts and do window shopping. I have been noting quite a few shops which had taken space in Malls have vacated it. Only big brands are managing to stay float. The question over cheap housing  in Mumbai still remain.
How do you make housing affordable?
The land prices have gone very high and the only way to get cheap land is to do rehabilitate a slum and you can really move fast if there is political support.
 
Loads of wisdom from the man who is closest to the housing market in India.  I also liked his take on reforms in India:
 
The Indian economy has had a phenomenal growth till recently. Do you see any missed opportunities?
We didn’t do many things. Particularly, we did not start any large project. There are six steel mills under planning but not even one of them got the (required) approvals. There are problems of land allocation, environment, iron ore, lack of infrastructure…. The Mittals, the Tatas, the Essar group, the Jindals (JSW Group) and Posco, all have big plans but none of them has started construction as yet.
Similarly, I know plans of a dozen-odd greenfield and brownfield cement plants are. For instance, LafargeSA has plans for four states – Himachal Pradesh, Karnataka, Rajasthan and Meghalaya, but not a single project has started. 
If we don’t increase our domestic supply of cement and steel, it’s going to kill us in the long run. In every sector, I see the same thing.
We have been hearing horrendous stories about FCI. Food is rotting there. Has anybody looked at reforms at FCI? Shouldn’t there be a public debate on it? These are all adding to our inflation….
We have killed our fertilizer industry by giving them unremunerative prices. The government subsidy comes after 18 months and banks do not give working capital to the fertilizer companies. I was a director on the board of fertilizer company but I left as the company was turning a defaulter. I could see this coming and resigned very quickly as otherwise RBI would have blacklisted me (for being a director of a defaulting company)
🙂
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4 Responses to “Understanding the surge in housing prices in India”

  1. Interest Rates » Understanding the surge in housing prices in India Says:

    […] Read the rest of this great post here […]

  2. Avid reader Says:

    Thanks for posting this. It was an eye-opener.

    I hope you have been paying attention to the latest bailout in the US. I think overall the RBI has performed well. If only our politicians were up to the mark.

  3. automotive floor jacks Says:

    I must say, that I can not agree with you in 100%, but that’s just my opinion, which could be wrong.
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  4. colo sani Says:

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