Don’t see a bubble in real estate – HDFC CEO

While housing prices in some markets in the country may see a correction, overall, property prices are not in a bubble situation, Keki Mistry, CEO of the Housing Development Finance Corporation (HDFC) of India said.

Mistry, leading one of India’s biggest housing loans provider, did not seem overly worried about the possibility of a correction in India’s real estate market.

Prices in the Indian real estate market have risen sharply over the last ten years. In many places, prices have gone up by about 20 times in the last ten years as consumers have taken out housing loans that stretch over 20-30 years, trying to tap into the growth phenomenon.

While the market has served the investors well for long, of late, cracks have begun to appear in the once-trusted investment avenue. According various reports, prices in many places in Mumbai have remained static or fallen over the last twelve months, something that was considered impossible even two or three years ago.

While growth continues in certain markets like Bangalore, even here, the pace of increase has slowed, and buyer appetite has fallen. The National Capital Region has also seen considerable slow down and stagnancy in real estate, or housing, prices.

Many analysts have warned that India may be on the precipice of a US-like housing bubble burst. Indian lenders, such as State Bank of India and HDFC, often lend up to 80% of the value of the house. For HDFC, however, the weighted average exposure is to the tune of 65% of the property’s purchase value, Keki Mistry said.

In an event of a 30% or higher fall in property prices, many housing loans would be ‘out of the money’. In other words, it would be cheaper for the loan-taker to walk away from the loan, and his investment, than to continue to service it, as happened in the United States.

However, Mistry said the average house price for HDFC is only about Rs 35 lakhs, and therefore, it is too early to draw conclusions about a bubble in the market.

“In our case, our average loan-size in the current year, up to September, 21.7 lakhs. So if you are looking at 65% valuation, then the average property value is around 35 lakhs,” Mistry said today. “35 lakhs is not the kind of property where people speculate on investments. Essentially, the demand is from end users, people who are going to occupy the houses.”

“I don’t think people really invest in properties. Property as a form of investment is not very large. It may concentrated in one or two pockets of the country,” he added.

Mistry however agreed that there are certain areas in the country where prices have appreciated very fast, and that some correction may be seen in those markets.

“There are pockets in which prices have risen a lot, and pockets in which prices are reasonable. In pockets where prices have gone up a lot, there is the possibility of a correction. In pockets where prices have risen gradually over a period of time, we may not see that correction,” he said.

India’s real estate sector is dominated by companies that have political connections. Many believe that the companies have used their political clout to ensure that housing loans qualify for substantial tax concessions, luring many salaried people to take housing loans to reduce their tax liability, and in turn promoting the growth of the sector.

According to recent reports, it would take nearly 5 years for the current inventory of houses in Mumbai to be cleared, if real estate companies continue to sell properties at the rate at which they are doing now. Other cities also have similar numbers, pointing to an unsustainable inventory build up caused by an unwillingness on the part of the builders to reduce real estate prices.

“Commercial properties, because of the slow down, have been slower to grow. Residential properties, it has been really strong. In the short term, you can see a correction here and there, but if you take a five-year view on properties, I don’t see any significant change in prices,” Mistry added.