Look at this part:

One clear clue (regarding the rising real estate prices in China) is that the average price-to-income ratio in Beijing has reached 27:1, five times the world average, according to data from the Bureau of Statistics of the Beijing Municipality. In addition, the average price-to-rent ratio neared 500:1 in the city, far above the international alarm threshold of 300:1, which sends out a clear signal that the foundation of the real estate boom is losing stability.

What are the corresponding rates for India? Where I live – rents are approximately 25,000 per month and the house prices are 90 lakhs – a price-to-rent of 360:1, which is already “alarm” level. Price-to-income ratio though may be a more benign 5:1 – assuming most families where I live would earn at least 18 lakhs a year.

I have no idea of India-wide statistics or even Delhi-wide statistics.

This post is written by Deepak Shenoy, at Capital Mind.

Low interest rates, a rapidly recovering economy, and India's never-ending demand for housing: it all adds up to a convincing case to invest in the Indian real-estate sector.

But here's an eye opener: prices haven't substantially recovered after a correction which ended six months ago. In fact, except in pockets of demand like Mumbai and to a lesser extent New Delhi, demand for residential properties remains weak.

Even in the big cities, the pace has slowed after a brief six-month sprint, amid a flush supply of homes and prices that remain out of reach of many buyers.

Research firm Liases Foras notes that new residential-unit sales in Mumbai peaked in the June-end quarter, at about 20,000 units, with turnover down to 11,000 units by the fourth quarter of 2009.

"At current price levels, it's tough to sustain the momentum, leave alone increasing it," says Pankaj Kapoor, the firm's managing director. It's no surprise, then, that developers are wary of trying to raise prices. Conditions will become only more challenging if, as expected, India's period of low interest rates comes to an end.

There are signs of lower cost housing – the Gurgaon/Delhi Radio Networks are flush with ads like “buy a house for 23 lakhs in Ghaziabad” etc. (They might forget to tell you cement is extra, the location is closer to China than Delhi and so on) And there are teaser rates from all sorts of banks – I heard of a recent offer of 5% for the first year! (Another post on that)

The figures that the real estate companies provide this quarter and the next should give a better picture. The WSJ article may be just an early indicator that it’s not all roses out there.

Like the author notes later in the article, Real Estate stocks have jumped back; and many more IPOs are in the offing. Will the market turn around just as they list? Or will that IPO gong be their death knell?

This post is written by Deepak Shenoy, at Capital Mind.

The Reserve Bank of India (RBI) plans to direct banks to stop levying penalty on pre-payment of retail loans, heeding to a long-standing demand of borrowers availing of floating rate loans who find benefits of periodical interest rate cuts eluding them.

“The right to avail of loans at lower rates of interest should not be curtailed by prepayment penalties. We will direct banks to do away with the prepayment penalty in case of loans disbursed in future,” said an RBI official. However, the banking regulator is yet to decide on whether this benefit should be given to existing borrowers, he said, requesting anonymity.

The hit will be taken by private banks (not all, Axis bank is already offering loans under 9% with no prepayment penalty) and by NBFCs like HDFC and LIC Housing Finance. Securitization may help some of them but the RBI isn't too keen on making it a diseased market on steroids like it is abroad. (i.e. there will continue to be a lot of regulation)

They should mandate a single PLR per bank too, and a violation should make all home loans carry the highest risk weights (destroys leverage and the bank's profit margins). But anything to make the market more transparent and less dishonest is a good thing. Banks can tighten up and refuse to lend to real estate - but hey, where else can they lend?

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

This is a horrible image to sell to customers, when the reality is in fact very different.

First, note that all home loans in India are full-recourse loans. Meaning, if you default then they can sell the house - if the sale yields less than the loan amount, they can take other assets from you.

This means you can't just mail in your keys and say goodbye to the loan (like the US allows). This also means banks have not enough reason to do "background checks" or scrutinize the property you have taken a loan for. If the collateral gets stuck because of some legal issue, you're still liable for the loan. They can take something else you own, like your car, and FSM forbid, your cellphone.

The incentives are just not there for a bank to really investigate a property they lend against - and it shows. Recently, I noted how ICICI double lent against the same property - they gave two different loans against the same underlying property - is that enough "legal scrutiny" for you? Of course, that case was even more zany because they had originated the other loan also, making an even bigger mockery of their "scrutiny" process that the good son in that advertisement was relying on.

Banks tend to charge "legal costs" during the loan process - in Bangalore, it used to be 10-15K per flat. Still, the work is shoddy because of misaligned incentives again, as the person who is doing the work (the lawyer) isn't accounting the person who is paying (you). If you hired a lawyer yourself you might get a better investigation done.

The correct thing to do would be to ignore these ads and do the right amount of due diligence yourself. In the US, banks tend to have no recourse other than the property so they must scrutinize the loan properly; even then they found the bubble in securitization was enough to palm off the risk to other buyers, and "loosened" scrutiny for both the underlying homes (inflating quotes) and borrowers (allowing very low quality creditors in).

In India, they have full recourse, so if you're a rich buyer they won't care about the property so much. Some banks even take "guarantors" apart from property papers; if the property isn't enough, and you vanish, they will go after the guarantor. So the only thing that hurts the banks is a slow legal system; but that's starting to change. And it WILL change for the "faster", in the 20 year tenure that you pay your loan on. So if the banks get to foist a bad property on you, it will be your problem; so do the diligence yourself. You don't want to be in a situation where you get a big loan on a property, the property gets stuck in a legal case, and the bank comes running to seize your other assets. You can't say, "But you did the scrutiny" - the bank will somehow develop amnesia.

(As for exactly what kind of diligence: Ranges from getting full ownership history of the property, various government approvals, any court cases, appropriate copies of Powers of Attorney if any, builder history, running advertisement for x days soliciting no-objection etc. A laywer will know best)

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

PM Senthil Kumar, a Delhi-based executive, booked a flat in Omaxe’s project called Galaxy in Sector 112, Noida. Since 2007, he has already paid over Rs 10 lakh to the developer. However, when work on the project did not start even two years after its launch, Kumar applied for a refund. He says he had booked the flat not because he wanted to speculate in property, but because he needed a place to live in.

Kumar says Omaxe has shattered his dream of owning a house. “I have visited their office and requested for refund with interest. They are not agreeing to this. They also say that they will not refund the money before December 2009. And even then they will only refund the principal. It means that my money is stuck with them for more that two-and-a-half years.” He said when he enquired with the developer about the project, he was informed that the New Okhla Industrial Development Authority (Noida) had not given them possession of the land for this project till date because of a compensation-related issue with farmers. “How can a developer book flats without even owning the land? Isn’t this a fraud?” asks Kumar.

...

• Making a deal without even owning the land on which the apartment will be built.
• Untenable delays. In one case of a scrapped project 125 buyers were hoodwinked into buying even before the land was acquired.
• Delayed refunds and loss of interest
• Over promise, under deliver - Omaxe promised 10 lakh "affordable" homes and has yet to deliver on one. In other projects, they "handed over" control to residents without completing basic amenities.
• No "completion certificate" for a project, which is critical for getting other approvals like water/sewage connections.

Even where I live, Park View City on Sohna Road, the developer has delayed construction of a gymnasium though we're nearly at 80% occupancy. But things are dramatically improving here now - as they are in the Nile - as the residents take control. In the time we have been here, in both the Nile and PVC, swimming pools have come up, parking has been streamlined, maintenance has been perked up, security procedures set in place etc. ; all the hard work has been done by the residents, even though they have to pay very hefty monthly charges (upwards of 3k a month per apartment) to the builder!

There's little wonder why I will never recommend under-construction properties. You don't want this kind of hassle. At least when you buy a ready property you can bypass the mudslinging between the early adopters and the builder; you get to examine what you will eventually live in; and the early problems will have been sorted out. The prices may not be very different (they've not gone up in the last 12 months) though this will depend on the stage of the market.

Omaxe's share price, at Rs. 123.15, is near a one year high of 130. It's recovered a lot from the lows of Rs. 40, but way below the all time highs of Rs. 600. The builder's just gone through a ratings downgrade from Fitch (which means nothing; Fitch reacted WAY after everyone knew there was a problem, look at the stock price).

(Click for a larger picture)

Profits crashed to 9.78 cr. last quarter from 46.52 in Q1 2008. Their consolidated EPS for FY 2009 was 2.38, and for the trailing 12 months is a negative Rs. 1.02. Does the stock deserve a ridiculous premium? We must ask the God of Land Bank Valuations.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

But buying a house to live in is hardly limited to economics. People would buy to own - so they can modify the house without taking permission, install split a/cs where the like, or do up a room to make their kids happy. Or whatever. It's an emotional decision as well.

When I decide to buy - when I can finally afford the price and the serious modification I will need to do - I will not buy an apartment "under construction". You end up financing someone else's lifestyle. But there are other, more important reasons.

Typical deals are: you sign on a piece of paper looking at a hole in the ground. The builder promises to give you a "ready" house in say three years. The apartment size is shown to you and the "amenities" you will get, like a swimming pool, a tennis court, water to drink, air to breathe etc. You then get a bank loan for 20 years for some part of it, and the rest will fall in place.

Or so you think.

First, the bank loan is payable to the builder in installments; he gets a certain amount down, then a certain amount on completion of every "slab" and so on. If you build your own house, the bank loan is structured such that you get the money and you pay the builder (again, in installments). But in recent apartments, the builder gets the money directly from the bank, without your being in the loop. Effectively, you are giving the builder interest-free money, while you pay the interest. You have no control over when the money is released, and how much - it's all part of the loan deal. Without this control, the builder can easily gather money by building "slabs" - the bottom layer of a floor - after erecting tall pillars. The real money is spent in the finishing; building pillars and beams is very inexpensive. Yet, builders get money based on how many slabs they finish, and only a small percentage at the end.

You don't pay for what you are getting - in fact you pay a substantial amount more until that last payment, a tiny balloon of about 20% of the whole cost. Finishing alone, though, costs a big whopping percentage of the lot - the marble, the bathroom fittings, electricals, doors, paint finish and plumbing.

When you pay an equal installment per slab, you assume expenditure is in the same pattern, but it's not - the expense is a big balloon at the end, so the builder is effectively getting more until he has to do the big kahoona expense at the end. You're paying interest for this extra money, meanwhile.

And builders are fickle. They will leverage the extra they get, spending it on building more holes in the ground to sucker more willing buyers; when the time comes to finish a project they hope they'll have enough money left. In many cases - heck, in nearly all the cases I've seen, they don't finish projects satisfactorily. Promises are broken; some of the things they do when "handing over" property:

• Walls have that horribly uneven texture under a coat of crappy paint
• Doors and windows that are badly fitted. A Sobha Group apartment owners group complained once that they could kick the doors in - the frames were stuck with bad glue! And in a building here in Gurgaon, entire ceiling-to-floor windows fell inward during a small storm - in multiple apartments.
• Bad plumbing - so much that nearly every apartment building has seepage into the walls within the first year.
• Crappy electrical sockets and switches. Advertise one thing in the brochure and provide something else.
• No proper lighting or finishing in the parking area, with leaks and chipped cement visible.
• Unfinished pools, children's play areas etc.

The point is not that you can avoid these messes. You will always have them to some degree even if you build your own house. Yet, it's about incentives and leverage. You have paid everything upfront. Or most of it. The builder's made you wait, and now gives you possession with a crappy finish. Are you going to refuse? You're now willing to take anything - after all, you'll have paid three years of interest on an increasing amount and rent alongside. To you, it's literally a take-it-or-fuck-off deal. The only leverage you may have is that if you raised a fuss some other people wouldn't get suckered into buying the builder's newer holes in the ground - a ploy that worked for the buyer in the video above, as Unitech took some action after the video became famous.

Even that is not much leverage. New owners get scared that if the mass public got to know of the problems in a complex, property values will fall there. This doesn't help those that live there - a market price concern is hardly useful when you have to deal with a bad construction situation everyday. Still, people are inordinately concerned with the market price of properties they don't intend to sell for the next few years. It's like being bothered that the mobile phone I bought a year back is worth Rs. 5000 less today.

So threatening to kick up a fuss will make you an enemy of your neighbours. Not kicking a fuss means the builder will ignore you. Rock and hard place.

Builders also know they have inordinate leverage just before "handing over" possession. So the latest ploy is to randomly state an increase the size of the apartment, saying the "super built up" area is about 100 sq. ft. higher, so the owner needs to pay up the extra cost at say Rs. 3,000 per sq. ft. You can't complain - you don't even know how the "super" built-up area was calculated in the first place, because they don't give details. So asking for a clarification doesn't help - they can easily stall you for a long time, and you've already paid most of your money. No leverage, and the incentives are working against you.

The worst thing is the waiting time. Nearly every project I know is delayed - from a few months to nearly five years. My parents booked a property in 1980 - they got possession in 1991, with a cost escalation of 100%. That itself has put me off under-construction projects forever.

Prestige Shantiniketan in Bangalore was supposed to be ready two years ago, in 2007 - it's still nowhere close to being done. (oh, and part of one building collapsed during construction) Brigade Gateway, delays are beyond a year now. In Gurgaon, half finished projects dot the landscape - next door to where I live, a Parsvnath property lies with the front housing done, and the rear part with erected scaffolding for nearly six months of no progress. In Navi Mumbai, properties that looked like they were just about to be ready stayed in that state for the year I stayed there.

Lastly the real estate broker lobby is a pain - they get higher incentives from builders, sometimes even 10% - so they peddle under-construction properties ("holes in the ground") over ready-to-occupy premises.

Some more forums on the pathetic state of new booking based real estate:

• Bangalore Property Developers
• Brigade Gateway - Delay
• Indian Real Estate Forum on a Unitech cancellation

I'll bide my time. Either I buy land and build my house, or I'll get a good deal on a ready property which has been used a few years. I might buy "under-construction" at throwaway prices, purely for investment, on an as-is-where-is basis - then I can factor the cost of finishing the rest of the work myself and look at gains. But I'll pay well to get a ready house: if I'm buying for emotional reasons I would rather not have the worry and pain.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.