Speaking yesterday to TheJournal.ie, David Browne of real estate firm Savills Ireland said that the number of housing transactions had “come down dramatically”

What is wrong with people in Bangalore buying apartments, in any condition?

A couple of truths beyond hype.

  1. Bangalore and most other major metros in India are in a massive bubble. The apartments are booked by speculators by the dozens ; by paying booking amounts and Vijay Mallaya style bank loans with no guarantees or income to support it.
  2. End users who have bought before at more reasonable rates of Rs. 50–80 lakhs have been paying up EMI’s at nearly 10% for last 10+ years. They have paid nearly 1.6 Cr plus for an apartment worth 80 lakhs and hence will not be able to sell below double the price.
  3. However, at these 1cr + prices, they have few buyers. Incomes are not rising as fast as the apartment prices. Median IT salary is roughly 8 Lakhs per annum. That means that the take home will be around Rs. 50k per month. This persons lifetime disposable income after taxes and living expenses is unlikely to go beyond 80 – 90 Lakhs. No bank will give out a 1.5 Cr loan to a person whose lifetime income is 1 Cr and repayment amount is 4+ Cr in 30 years (current 3BHK prices are at 1.4Cr).
  4. Builder in deep debt with extortionist interest rates. Builders have to take huge loans from banks at above 14% rates and that quickly triples in repayment amount by the time the project is completed. Most builders hence increase the prices early on to buyers to pass on that debt to buyers. So the pre-sale price is already a high price.
  5. Rental yields no longer cover even the interest amount let alone the EMI. The rental value is between 20–25K for a 3BHK apartment that works out to 2.5 – 3 Lakhs per annum pre tax. Your EMI for a 1Cr property will have a 10% interest component (compounded and effective rates). So you are burning 7 lakhs after renting it out and all 10 lakhs if you self occupy. The rental yields are just too small for the property prices to be justified.
  6. Fall of Bangalore : From a beautiful city in early 2000’s to a complete piece of crap, the city is junked. It stands no where compared to any major city in the world. The water is about to dry out completely and roads look like a war zone. Drains overflow with sewage openly flowing on the streets. While city administrators have failed to provide basic utilities, they have been on a roll with increasing valuations and extortionist taxation. One almost pays 20% in taxes and fees for these ridiculous 1cr+ valuations. It may not be a big issue for the city admins or the builders, that is a price the buyer has to pay and directly affects the buyers affordability.
  7. Dollar economy : India is now technically spending in dollars while earning in rupees. That means its cheaper to buy properties overseas than in Indian metros. NRI money is drying up from real estate. There simply no one left with the money to fuel the developer-speculator-babu nexus.

In summary, Bangalore real estate has the buyers priced out. The property has simply moved out of reality to a point of no transactions. The city has very few transaction going on and sales / re-sales are not happening. I suppose its the same in most metros based on the reports.

Lehman Brothers in the making:

The most dangerous part of the Indian economy are the banking sectors. With the interest rates and lack of sales, the speculators will now have to cough up high EMI’s or default. The warning signs are all over the place. Be careful with your money. No one knows what will happen when shit hits the fan and all of them start to default. The bank NPA’s, all the bad loan issues, governments bail outs, and high taxes are covering up the fact that the economy is ready for a massive correction.

Conclusion :

No one is really buying apartments for last 3 years other than speculators. No one is buying and hence initial question that people are buying at any prices is false. The apartments are sold out in pre launch at 50% + discount to speculators to boost up the valuation and then try to con and fleece the end user. Let the stalemate between buyer and builder continue and lets see who blinks first. Market forces will eventually prevail.

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