When it comes to investing in real estate, the greater fool is you


I am in Delhi as I write this listening to FM radio. I rarely listen to FM and am surprised at the number of real estate advertisements still being broadcast on radio. What makes it even more surprising is that the real estate market in much of Delhi and the surrounding National Capital Region (NCR) continues to remain in a mess. A possible explanation for this may lie in the fact that radio advertising is cheap in comparison to other forms of advertising.

The business lobby Assocham, recently conducted “random survey of nearly 125 real estate developers in Delhi-NCR”. The survey found out that the “demand for buying property have decreased by over 30% over the last year.”

In fact, sales have fallen despite the home prices having crashed. As the Assocham press release points out: “The prices have almost crashed but they are still un-affordable. Be it Rohini, Dwarka, South Delhi, Noida, Gurgaon, the prices of property are down by 25-30% as compared to the last two years… The ticket price 3-bedroom, 2 BHK  and single room flats has seen correction by 30 per cent in Noida, 25 per cent in Gurgaon and 15 per cent in some key areas of Delhi but still, the demand stays subdued.”

The total number of unsold homes in NCR stands at 1.7 lakh. Of this around 62% homes are uninhabitable. As Assocham points out: “The problem has been confounded by delays in regulatory clearances and litigations, points out the survey.”

The radio ads are trying lure people in, by harping on the fact that they don’t need to put the entire money upfront. Further, the ads talk about lower down-payments and lower EMIs. Given that 62% of 1.7 lakh unsold homes in Delhi are under-construction, it makes no sense to buy an under-construction home, which the radio ads advertise.

What these ads also tell you is that the builders (especially the smaller ones) are desperate for money, given that the conventional source of lending through banks has more or less dried down during this financial year. In this scenario they will be happy to raise any money that they can. Chances are that they will use this money to complete their earlier projects. Hence, the new projects that they raise money for will continue to remain uncompleted. Given this, it makes no sense to buy a new under-construction home in Delhi NCR as of now.

I decided to test this hypothesis at a wedding I attended in Delhi. Of course, the sample was small and hence, readers need to keep that in mind. But it does not change the points that I am trying to make here. The general feel that I got from the people I spoke to in Delhi was that they would still buy an under-construction property if they were able to afford it.

Most of these people I spoke to are Delhi residents and they have had a special relationship with real estate. They have seen the price of their DDA flats multiply many times, over the years and still believe in the power of real estate. And most of them hoped that they could sell an under-construction property to someone else in the years to come.

The Greater Fool Theory was at work. As Jason Zweig writes in The Devil’s Financial Dictionary: “The belief that no matter how foolish a price you pay for a stock or other asset, you can always find a greater fool who will pay more to buy it from you. Why bother figuring out what a stock [or a home] is worth, when you can simply gamble that somebody else will think it’s worth more?”

This, despite the fact that most of the people I spoke to knew someone who had bought an under-construction property and was still stuck with it, neither having been able to live in it or sell it on forward.

Further, the trouble in the Indian case is how does one figure out the right price of a home? Only the brokers operating in a particular area tend to have that information. And they do not always have the best interest of the prospective buyers in mind.

As Sanjoy Chakravorty writes in The Price of Land—Acquisition, Conflict, Consequence: “The price of a given piece of land [or a home], like the price of everything else, is based on information on the price of other pieces of land: prices paid in the recent past and prices paid elsewhere, especially in nearby locations.”

Such information is not easily available in the Indian context. As Chakravorty writes: “If information on prices is not available and the rights to negotiate and refuse do not exist, a real market does not exist.”

And this is precisely how things stand in India. Given that there is no clear cut way of knowing the right price of real estate in a particular area, there is a great belief that home prices and land prices do not fall.

The trouble is that home prices have been falling in Delhi NCR. It’s just that it takes special surveys like the one by Assocham to bring this fact out. This information is not available on a regular basis, like is the case with the stock market, where you can see the price of a stock going up or down, almost 250 days a year.

And this lack of a real market has its costs. As Zweig writes: “It might seem surprising that there could ever be a shortage of fools in this world, but if you count on always finding one just when you most need to, you will make up one day to find that everyone else has suddenly smartened up and the greater fool is you.”

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on valueresearchonline.com on Dec 3, 2015

The Delhi/NCR real estate market is dead

The real estate consultant Knight Frank has released a research report on the real estate market in Delhi and the National Capital Region (NCR). The most important point in the report is that home sales in Delhi and NCR have crashed by 50% to 14,250 units, during the period January and June 2015, in comparison to the same period last year.

The launch of new homes has also crashed dramatically by 68% to 11,360 units, during the period January and June 20115, in comparison to the same period last year. The total number of unsold homes in Delhi and NCR currently stands at around 1.89 lakh units as per Knight Frank.

Hence, the quarters to sell unsold inventory has jumped dramatically. As of June 30, 2015, the quarters to sell unsold inventory number was at 19 quarters. What does this mean? Knight Frank defines quarters to sell unsold inventory as: “The quarters to sell unsold inventory (QTS) is the number of quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter.”

Hence, quarters to sell unsold inventory is derived by dividing the total number of unsold homes currently, by the average rate at which homes have been selling over the past eight quarters.

Given that the average sales over eight quarters or two years is considered, the current average sales rate is lower than the overall average sales rate. Hence, if the quarters to sell unsold inventory were to be calculated using the latest average sales rate, the number would be even higher than 19 quarters.

Let’s do some basic maths and try and understand this. The total unsold inventory of homes in Delhi and National Capital Region stands at 1,89,678 units. The quarters to sell unsold inventory is 19 quarters. This means that the average sales rate for the last eight quarters thus stands at 9,988 units (1,89,768 divided by 19).
What is the latest sales rate? For the first six months of 2015 the total number of homes sold in Delhi were 14,250 units. This means a sales rate of 7,125 units (14,250 divided by 2) on an average, over the last two quarters.

If this number were to be considered as the average sales rate, then the quarters to sell unsold inventory would jump to 26.6 quarters (1,89,678 divided by 7,125) . What does this mean? If the total number of unsold homes continue to sell at the rate that they are currently selling at, it would take more than six and half years (26.6 quarters divided by 4), to sell them totally. And this, if no new homes were to be built in the days to come.

As can be seen from the accompanying graph, the quarters to sell unsold inventory has jumped big time over the last one year.

Quarters To Sell (QTS) Unsold Inventory Analysis

As Knight Frank points out: “NCR has moved from a quarters to sell unsold inventory of 14 to 19 in a six-month period. Though January to June 2015 was the leanest half in terms of new launches, the absence of sales velocity has pushed the quarters to sell unsold inventory to nearly 5 years.”

In fact, as the earlier calculation shows the actual quarters to unsold inventory might be more than six and a half years. This is the kind of mess that the real estate sector in the Delhi and National Capital Region is in. Some of the unsold inventory is more than three years old, as can be seen from the following graph.

Micro-Market-Wise QTS vs Age Of Inventory

Data Source: Knight Frank Research.
In fact, to realise how quickly the situation is deteriorating we need to look at how things stood at as on June 30, 2014, a year earlier. The total unsold inventory one year back stood at 1,67,000, data from Knight Frank tells us. The quarters to sell unsold inventory stood at 9. One year later it is at 19.

Also, the average sales rate was at 18,556 units (1,67,000 divided by 9). Currently it is at 9,987 units, which is a fall of more than 46%, during the course of one year. As Knight Frank points out: “The opening up of new land parcels for development while the existing ones were still not fully utilised is seen as one of the reasons behind the inventory pileup in NCR.”

What makes the situation worse is that new supply (despite falling) will keep hitting the market. As of December 2014, 1,92,568 units were under various stages of construction in Delhi and National Capital Region. The latest report of Knight Frank does not provide an updated number. But given that only 11,360 new homes hit the market, the under-construction number as on June 30, 2015, cannot be significantly different from the December 2014 number.

To conclude, the real estate market in Delhi and the National Capital Region is dead. It will take many years for this market to recover. Your money will be better invested somewhere else.
Postscript: Hopefully, next week I won’t write on real estate.

The column originally appeared on The Daily Reckoning on July 31, 2015