Friday, November 17, 2017

Investment News and Commentary from Emerging Markets in Asia - China, India and ASEAN

About discusses business and investment news rising from the geopolitical relations of China and India, and the interactions these two countries have with the rest of emerging Asia.

Property Prices May Decline in Mumbai. What About Shanghai?

By Vivian Ni

Apr. 4 – Mumbai and Shanghai, as the financial centers of the world’s two biggest emerging economies, have witnessed their property markets go through a similar path over the past decade – seeing an astonishing price surge, experiencing the turbulence during and after the Global Financial Crisis, carrying the similar concerns over housing bubbles that exacerbate domestic inflation, and facing the social sentiment of the masses that cannot afford the expensive properties.

Mumbai is turning into one of the most expensive cities to live in among all the cities in the developing world. And as the Indian government has started to take measures to curb inflation, many property developers are now faced with fund shortages. A number of analysts and economists believe Mumbai’s property market will see an oversupply between 2012 and 2013, and predict that real estate prices will go down in the near future. Similar with India, the Chinese government has also issued a series of restrictive regulations recently in a bid to suppress property prices. However, both the Chinese people and the Shanghai local government do not seem to be very confident that the measures can thoroughly clear the bubble in the housing market. Whether Shanghai’s property market will finally become more affordable to people still remains a question.

Property market cap growth in Shanghai and Mumbai – a similar pattern
Both cities have experienced significant property price increases stepping into the 21st Century, and witnessed two major rounds of prosperity before and after the recent financial crisis. Although Shanghai’s property market started its boom a bit later than Mumbai’s, the price increases over such a short period have been just as intense.

Along with the strong economic growth and rapid urbanization, Mumbai’s real estate market started the price surge in 2000. By 2002, residential property in Mumbai was already worth 85 times of the city’s annual average income; while by 2006, the property value reached 100 times the average income.

A slightly overheated property market emerged in Shanghai in 2004, when house sales surged by 22 percent from a year earlier. However, some new government regulations released in 2005 restrained such an upward trend right away. The restriction that made buyers “wait and see” led to a strong growth in housing demand later in 2006 and 2007. Total house sales soared by 47 percent in 2007 from a year earlier, and average prices almost doubled the levels seen in 2000.

The Global Financial Crisis in 2008 hit both India and China’s property markets, but did not totally stop the market value growth in Mumbai and Shanghai. In India, although the domestic demand for luxury housing decreased by 50 percent, and demand for affordable housing fell by 10 percent that year, the Indian National Housing Bank’s property price indicator Residex still showed a moderate price index increase of 4.5 percent in Mumbai in the second half of 2008, compared to the first half.

Property prices in many major cities in China dropped during the second half of 2008, according to the China Real Estate Index System, but Shanghai’s prices still went up by 2 percent in nominal terms and remained at the same level if the inflation factor is counted.

The two cities’ property markets welcomed their second spring that came with the economic recovery and government stimulus packages to revive the economy. Residential property developers in India were encouraged to build large land inventories and by the fourth quarter of 2010, Rs.120 billion (US$2.7 billion) has been spent on such projects. In 2010 alone, property prices in Mumbai picked up by 60 percent. A rate like US$5.1 million (or US$17,000 per square meter) is typical for a 300 square meter luxury-used apartment in the city’s prime areas.

After the financial crisis, the Chinese government launched an RMB4 trillion (US$585 billion) stimulus package with allocations for housing and infrastructure projects, various favorable tax treatments to property buyers, and relaxed lending policies to both buyers and developers. The Shanghai market thus experienced a quick recovery, seeing an average 19 percent month-on-month increase between March and July, 2009.

How big is the housing bubble?
The soaring housing prices have been blamed as a major contributor to both India and China’s high inflation rates. India reported its inflation rate at 8.82 in February while China’s stood at 4.9, with concerns that its April consumer price index may exceed 5 again.

Property markets in emerging economies like China and India are also ideal destinations for speculators. The massive amounts of cash that have been invested into the market considerably lift property prices and exacerbate inflation.

While Mumbai’s property market was ranked as the 10th most expensive worldwide and Shanghai’s ranked 35th last year, the housing affordability in the two cities – if measured by income to price ratios – is typically low compared to other developed cities in the list. Disregarding the lending rate factor, an Indian citizen that earns an annual income at Mumbai’s average 2009 level of Rs.125,000 (US$2,812.8) will theoretically spend 369.3 years without any other consumption to afford a 75-square meter apartment that is worth US$1 million in South Mumbai. Shanghai’s houses are more affordable compared to Mumbai, but a Chinese citizen that makes Shanghai’s average 2010 annual income of RMB31,383 (US$4,868.6) still has to save 52 years without any other consumption to afford a 75-square meter apartment, according to 2010’s average per square meter house price level RMB22,261 (US$3,404.1) released by the government.

The low rental yields can be another indicator to show the size of the housing bubble in both cities. Statistics for 2010 show that Mumbai’s rental yields stand between 3.5 percent and 4.6 percent and Shanghai’s only 3.7 percent. The numbers that are usually tied up with the supply – demand conditions also revealed – to some extent – the real affordability of the market.

Will property prices fall?
In Mumbai, the expectation for its property market to decline is strong. In fact, prices have already started to drop in some areas of the city, such as Parel, Lower Parel, Mahlaxmi, Bandra East, Andheri East, Goreagon East, Mulund and Kurla. The overall price level has already seen a 20 percent correction from the peak level.

Lack of confidence in Mumbai’s property market also shows in the capital market. Major Indian property stocks have fallen by 27 percent in the past three months, warning people of potential risks brought by the expanding current account deficit and solvency issues.

The major factor that may lead to another 15 percent to 25 percent price fall in Mumbai’s property market is the fund shortage developers are currently suffering from. Many developers have started to offer discounts to buyers, hoping to mobilize fund inflows through increasing sales.

The funding channels for property developers in Mumbai are decreasing, as the Indian government is determined to curb inflation and banks continue raising their lending rates. The stock prices of India’s ICICI Bank and HDFC Bank have seen around 11 percent falls during the past three months, indicating the possibility that many Indian banks have been “tapped out” and it will become increasingly difficult for property developers to obtain loans from banks.

On the other hand, the speculation on a property oversupply in the near future is increasing. The U.S.-based real estate consultancy Jones Lang Lasalle believes that “the overall sentiments of the market and the consistent rate of new project launches in Mumbai give a clear indication of an impending oversupply by 2012.” Such a prediction will very likely lead to another round of property price falls.

The Shanghai market is faced with many similar challenges. Property developers are looking to raise more funds from channels other than banks, since the waiting-for-sale floor space has tied up a huge amount of funds, the lending rates have been going up, and some Chinese banks’ deposit-to-loan ratios are approaching the minimum reserve requirement.

Statistics from China CEIC Database show that by the end of June 2010, the waiting-for-sale floor space had reached 192 million square meters, tying up RMB1.6 trillion (US$244.7 billion) of funds.

After the People’s Bank of China lifted the reserve requirement ratio (RRR) to a record high of 20 percent in March, several major commercial banks such as China Merchants Bank and Bank of Communications are running out of their lending capabilities and may face a shrunk balance sheet if China raises the RRR again.

In addition to the fund shortage, the Shanghai property market may also need to watch out for a potential reversal in the supply-demand relationship. Demands are falling with the increasing down payment requirement for buyers, restrictions in loan issuance, and the introduction of property tax.

Despite all these challenges, the property price trend in the Shanghai market remains unclear. Various private equity funds still seem to be optimistic on Shanghai’s property market, providing property developers with a new avenue to raise funds from. The local government, often commented as being “knee-deep” in the housing bubble and gaining a great deal from land sales, did not specify any statistical goals in its latest 2011 property price control proposal, but only mentioned that it will try to keep the property price increase rate lower than the city’s GDP and average income growth rates.

Related Reading
Foreign Participation Surges in China’s Property Development
Bear Market, Housing Prices, and Inflation Create Quandary for Chinese

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17 Responses to Property Prices May Decline in Mumbai. What About Shanghai?

  1. Real says:

    Mumbai is turning into one of the most expensive cities to live in among all the cities in the developing world. And as the Indian government has started to take measures to curb inflation, many property developers are now faced with fund shortages. A number of analysts and economists believe Mumbai’s property market will see an oversupply between 2012 and 2013

  2. dwarkesh punjani says:

    property price will decrease in mumbai-dahisar -anand nagar area? if yes then why , because most of people are migrate from andheri to dahisar.

  3. dwarkesh punjani says:

    Look at Mumbai population. It is increasing day by day. People need homes to stay. There is no land. If one doesn’t want to live in shanty or chawl, then they either have to get out of Mumbai or pay the amount quoted by builders.[i want your sugession]

  4. Chris Devonshire-Ellis says:

    Mumbai needs some serious land reform to get the slums razed. They take up far too much land area. The inhabitants need to be installed in some decent hi-rises with good community facilities. Government needs to work better with property developers in this, and the politicians need to stop buying local votes to prevent it. – Chris

  5. Siddhant Gupta says:

    Dear sir,

    I am a developer coming up with developments in new mumbai region. As stated it is believed that there will be an over supply of property in coming few years in the market. Do you believe it is a good time to start of a new development now?

    If not, then till when do you think a developer shall wait for a comeback to grab hold of a strong appreciating market in the distant future considering the coming few years will see a slowdown.


  6. Siddhartha S Shyam says:

    great reading & learning

  7. Aman verma says:

    Bullshit! The black money from our ministers are invested in real estate and by the end of 2012 all the real estate companies will be on the ground and remember there are no actual buyer in the market so their shares will fall down ………fall down very fast and everybody loose in real estate.

  8. Satish Chauhan says:

    I strongly feel that property rates going to fall 20%

  9. Harris Rogers says:

    When the housing bubble bursts, its has to burst all the way not just loose some air. Thats what happened in US when banks started becoming more serious about lending money. The housing market along with the banking sector collapsed. There is no sign of recovery till the off shored jobs come back to US. Mumbai is following the same trend what US saw between 1998-2006. The current growth in India Housing sector is due to the fact US companies have invested heavily in India and its economy is booming, once US reduces its resources in India and starts adding Jobs in US, the tables will turn. There will be a collapse in India economy that will seriously hit the housing sector and rise in US housing market. At present there are more investors holding properties in Mumbai then buyers. Once the fear of housing sector collapse strikes them they will be running for the woods. I see 50% price correction in Mumbai housing price by year end 2014. Nothing goes up for ever, you just reach the peak and loose momentum and start to declining at a faster rate.

  10. Harsh Suryawanshi says:

    Ya i agree with Harris Rogers. At present there are more investors holding properties in Mumbai then buyers. I am facing the same issue since last few days as i am planning to buy a flat at Kharghar. Even at a budget of 50L i am not getting a decent 2BHK flat. Other which i am getting even for 42L to 45L are of investor’s and they want full payment in a month or 3 which is not possible for any service sector buyer. In 2008 Kharghar property rate was something around 3000 to 3800 psf and now at the start of 2012 its 5000 to 6500! what a drastic growth and hike. Its a big bubble. I can see so many projects coming up in Navi-Mumbai and the buyers are just investors not the real buyers. So guys just hold your home dream for few months. Its surly going to happen in a Big Way. Its really very risky in buying a home at such a bubble price. Don’t buy is simple solution on such bubbles.

  11. Roy R V says:

    I stay in central suburb with my parents planning to have a house of my own. I’m a person who earns Rs. 22,000 pm. and have been earning now for the last 3 years. What property can I buy with my salary assuming that I can save Rs 11,000 pm. Even the chawls here are overly priced. The houses costing 3 L in 2005 is grossing over 18 – 20 L today. 1 BHK apt building which costed 11L in 2005 are now prices over 60 – 65L. that is an appreation of 600% approx in the last 6 years. During the same time my house old income is up from Rs. 12,000 to Rs. 22,000. a marginal increase of 85% approx. Will I ever get a fair chance to buy a house in near future as others could 7 years ago.

    All I can affort is a house that may costs between Rs 25L to 28L (fair price considering the investment can double in 7 years if invested in legal low risk source like FD’s)

    Is there any possibality that the property prices can drop to an extent that it is affordable. Please advise is there any possibility.

  12. pankaj says:

    what if you can buy agricultural land instead of this high rising real estate flats. Agricultural land brings you tax free income every year and there is no fear of recession also.

    I predict that after this property burst people will shift to traditional agricultural lands and not in concrete jungles made on poor farmers acquired lands.

  13. Amit shah says:

    i am a lucky person on 2004 i purchased (dad) 4 Flat (each 4.5 lacs) for all member name recently we saled around 7 years we saled all falt 26 lacs each after all brokerage
    earned around 80 lacs within 7 years ha ha ha i am very happy, and also we have 3 flat in goregaon (w) Mumbai without problem we living in mumbai with only 50% of investment
    what great mumbai . thanks to mumbai and mumbaikars/broekr/agents you people are magician for my family

    thanks to all of you and also 2 more flat we booked in same kashimira green village

    what to do with enough money i hope because of broker /builder/developer/ agents/ govt authority/politician/ policies make us crorepati thanks mumbai

  14. Nishant says:

    I am Planning to buy 2BHK flat (ready Possession) at the rate of 5500/- at
    Kharghar Sector-3, Kindly anyone pls guide me is this is rate is ok to make the deal.

  15. Jacinta Lopes says:

    Are the property rates really gonna fall down. if yes when?????????????, i want 2 buy a 2BHK house at a decent place at rates less than 40 lakhs but everytime i plan the rates are just shooting up will a common man ever get chance to buy a decent house in a good locality?????????????????. 2 years ago i planned that i would buy my dream house in Vashi for 40 lakhs but today when i have cash there is no good house at this rate in Vashi.when there is no raise in salary and the salary scale for a common man is not more then 25000 on an average in our country how will a common man ever make his dream come true. why is not the property rates in mumbai as per the standard of living out here.

  16. Hassan says:

    In Jan 2013 some of the property rates have reduced by 10-15% but only in high valued property like Lodha project in worli. This price rise is fake, if u see what developers are doing is not completing 1 project and announcing another one as pre launch to get more to complete the 1st one, due to this they are trying to block the /sqft rate at high market level showing this is a real market which will never come down.

    But, the higher the horse the greater the fall,
    With Elections in 2014 Govt have a huge task to cut the deficit and due to which govt has already reduced the spendings which means no more perk loans to real estate from banks and increase in interest rates on loans due to less liquidity also equities trend is flat or in -ve which means investors are ignoring any sort of spending.
    Importantly IT sector & BPO will experience slow down from 2013-2014 Dec or more as Obama (US) will bring strict policies on outsourcing to create jobs in US. In Feb 2014 IT sector announced marginal increment due to lack of future projects & as per a survey 40% of property purchasers in mumbai are from IT sector.

    Obviously when the major contributor to RE isn’t ready to spend, also banks aren’t ready to lend there will be over supplied market without demand and rush of builders to earn even a penny.. As they have to pay TAX on the owned land and which increases every year with inflation.

    By elections black money in Real Estate will have to be freed to invest in election campaigns meaning more flats on sale.. And more need of cash for builders as new under construction projects will be on hold due to unavailability of cash.

    I am sure this bubble will burst for good of every common man and populists mafia will fall heads down,

    If u see the equitiy market its immatured to reach 19 or 20k points as Internally india is weak and has not developed as expected, no sooner the US markets are back on track all investors will start pulling money out of India to invest in US for better returns in $ and again indian markets will fall then the Debt & FD interests will start getting higher to maintain the liquidity… That’s the govt plan to curb inflation I believe .

  17. mark desouza says:

    I am happy to know that the flat prices are going to fall down it will better for a common man to buy a house which they need most n not the person who has excess money n want to invest for his profit n the banks should not give housing loans to the person who is already has a house or wants to invest the banks always ask if we have an existing prop for which they will ask for the original papers n they will pass their loans all this should b considered n then all will have decent home rather than a rich person with pots of black money

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