Indian Housing Property Market

By Ramesh Akkineni
from an article in Businessworld by Pankaj Pandit

Buying a house in India becomes more affordable for youngsters now:
Declining interest rates, rising incomes, have made houses more affordable for young Indians. Salary of an graduate engineer, twenty years ago, used to be in range of Rs. 30000 per annum. The house prices of a 1BHK apartment (600 Sq Ft-Carpet area) in metro suburbs in those times, were in range of Rs. 6-8 lacs, thus making house prices, about 20-25 times annual income. The interest rates on home loans then used to be much steeper, @ 15.5 per cent pa. Thus EMI for 20 year loan worked out Rs. 8120 per month, Or 320 per cent of monthly pretax income, making house purchase, an impossible dream, to be achieved only on retirement.

In circa 2006, the salaries of an engineer have risen to Rs. 5-600,000 per annum, and interest rates declined to 9.75 per cent. The prices of a 1BHK apartment in (more distant) metro suburbs are now in range of Rs.30,00,000 making house prices only 6-8 times the annual income. Moreover, low interest rates, and eligibility of IT deductions on housing loan, have made the EMI for a 30 lac loan 24, 951 (EMI Rs. 29951; after tax savings, the EMI is 24951); 60 per cent of salary, an affordable option for a double income family.

EMIs in 2006 are much affordable
[Image]

Thus rising income levels, simultaneous lowering housing loan interest rates, interest from NRIs, and finally a booming stock market that trebled since 2003, all have fueled India' housing property market. That over 50 per cent of Indian population are now below 25 years, means that demand for housing in cities will remain healthy for next 15 years.

Is property overheated? Equivalent of P:E in housing:
The P:E ratio is the market price divided by earning per share of the company. It tells the investor the number of years it will take to recover the investment made in a share, at present rate of profitability of the company. The average P:E of BSE scrip is said to be 18-20. In a identical way, the price of a property can be expressed in number of months of rent that can be saved (or rent that can be earned) if the property is let out. The global indicator of a price of property is normally 150 times monthly rent.

The ratio of house prices to rents in USA, Britain is 150, 155 respectively, previously in range of 100. As the property prices in these economies have gone up substantially by over 50 per cent, the ratio is now in range of 150.

In Indian context, if selling price of house is Rs.30 lacs, the monthly rent in an Indian metro city is found to be 0.5 per cent of the price of property or Rs 12-15000 per month. Thus average ratio of house prices to rents in metro cities of India, works out to be over 200-250, making house property seem expensive, at present rents.

In new areas, normally rents are much lower. Hence it is observed that ratio of rents to purchase price of flat, can work out to be in excess of 300-400, meaning a clearly overheated property market.

India's houses already priced too high in relation to rents?
[Image]

Ref: Data about Britain, USA, sourced from The Economist, September'06

Rents, the only true barometer of demand for property:
Rising housing interest rates make EMIs or owning house more expensive than rents. On other hand, falling housing finance rates make owning a house better option than renting. However, if economy slows down then demand for housing can falter, leading to a fall in both house property prices as well as rents. Thus strengthening rents is the only true indicator of a upcoming rally in property market. Post Tax EMIs payments have to be comparable with rents. Currently, the ratio of "price of property" to "rents per month" in boom towns, is in the range of 300-350, indicating weaker rents or relatively high prices of house properties. As seen recently in May'06, emerging equity market like India is not insulated from US, global equity market shocks. Only time will tell if the Indian property market can be different? The old adage, "fools build houses, and wise men go to live in them" hopefully is not true in the booming property and equity markets of 21st century!


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