Builders are having it tough, but a certain one, BPTP in the NCR region is offering a tie up with HDFC to give home loans at 5.99%.

"BPTP...today announced a partnership with HDFC to offer home loans at just 5.99 per cent per annum. This is part of a limited period special offer, designed to make home loans affordable to consumers," the real estate firm said in a statement.

Compared to prevailing interest rates for home loans, this scheme, valid between December 18 and December 31, will offer almost 40 per cent reductions in the EMIs for the first five years, it added.

Don’t be fooled. The loan is at 11-14%, which is HDFC’s rate. The lower rate is most likely because the builder is paying the difference, since the builder can’t get a loan at any rate (banks are maxed on their real estate exposure to builders).

The “new” house is unlikely to be ready for five years, so the builder gets the money while you pay 6% a year. Given how builders operate, it is entirely likely that the money received has already been spent (it’s a book entry to move the loan from them to you), so it’s on faith that you hope the house is ready on time, or within the five year period.

Obviously if the builder defaults, the loan onus is on you – for the remaining principal even if you don’t get the house because the builder is bust. And also for the excess interest, if the fine print dictates so.

If the “teaser” rate is being financed by the builder, it makes a lot of sense to understand the financials of the builder, and figure out what you can do to avert the threat of default. If it sounds too good to be true, it probably is.

The cabinet has approved Foreign Direct Investment (FDI) in Retail.

• 51% in multi-brand retail (think Walmart, Tesco)
• 100% in single-brand retail (like a Nike)
• $100 million minimum investment, of which 50% must be in back-end
• 30% of sourcing from SMEs in India
• Only in towns with over 1 million population

This has pushed retail stocks up – Pantaloon Retail, for instance, is up 16% to 233. Even real estate stocks are up on the hope that if foreign players come, they might rent some of that massive amounts of vacant commercial real estate that is their nemesis.

FDI in retail was always something considered unacceptable as it would drive away the small trader and kirana shop. The Indian chains – from Hypercity to Big Bazaar to Easy Day (Bharti/Walmart) – have started to kick in and will eventually the competition will hurt.

Near my house an Easy Day has started up which has all but killed local businesses, who it must be said were both overcharging and giving really stale goods.

In my view, that inefficient small merchant must go out of business, as the cart puller did when taxis came, and as PCOs did when mobiles came around. Better and more efficient technology is better for us as a whole – in fact, even my neighbourhood merchants admit that they source from Easy Day now. It’s obviously much better for the rest of us that see about 20% reduction in our bills.

The problem still remains infrastructure, the APMC monopolies and a wonky tax system. WIth much of the foreign players’ efficiency based on good road or rail transport, it’s hard to see them replicate their model in India without major changes. The inter-state taxes – much of which will only get streamlined once GST comes in place – delay progress and cause unnecessary round tripping for tax avoidance. Finally, sourcing of agricultural products will need on-the-ground presence, which is a long drawn affair – ask ITC how long it has taken them to establish good direct-from-farmer sourcing deals.

Other factors are that India is a horrendous nation for decision making. Going by the recent past, it’s entirely likely that in a couple of years, the government “reverses” the decision to please some vote-bank. Who the heck will want to invest in such a situation?

Lastly, Europe has been the world’s financier for a while, and they are in some doo-doo right now. Investment plans will have to factor in a change in the world financial system.

I expect that many big players will make noises about India being part of their plans, but not much more. Meanwhile, the stocks that go up are probably going to see positive news for a while, so they may be worth a trade.

A recent supreme court verdict is quite significant, in disallowing “General Power Of Attorney” (GPA) as a legitimate way to transfer property title.

Concept: GPA based sales went like this:

• I own a property that you want
• You pay me money to buy it from me
• You don’t intend to keep the property, you want to sell it for a higher price
• You don’t register a sale deed in your name, because that will involve your paying registration fees and stamp duty (can be 5% to 12% of the property value).
• Instead, you take a power of attorney in your name, which means that you act as my “attorney” in both selling the property I own and receiving money on my behalf.
• When you find a buyer, you register the transfer in that person’s name saying that you’re my representative (as my attorney). This time, registration fees will be paid, but for two transactions, fees are paid only once.

The “General” part of the GPA entitles the holder to do anything with the asset. (as opposed to “specific powers of attorney” where you limit the rights of the holder)

The GPA concept was being used in a number of ways:

1. To avoid high registration fees as described above.
2. To stash black money or avoid scrutiny. Since you do not need to disclose a GPA as an asset (it isn’t one) people can “own” property without anyone ever getting to know. Plus think of how good this is for politicians or public officials – they have to declare their assets, but since a GPA isn’t an asset….
3. For land grabbing. Find the owner, make sure he sells to you through a GPA; then sit on the land for years until it appreciates; then sell it. The risk here is that the seller could realize that the GPA means nothing to land authorities, so he might resell the land to someone else without the GPA holder knowing. (This kind of deal is often where mafia and politicians are involved)
4. For owning agricultural or restricted land: Since many states impose restrictions on who can own property (Himachal Pradesh) or who can own farmland (only “agriculturists” in most states), people use the GPA route to circumvent these laws.

Where are GPAs legitimate?

If you were living abroad and owned a piece of land in India, you’d want someone local to handle the small bits of work – like collecting a cheque, signing the registration deed etc. The idea isn’t to transfer your property to the GPA holder, it’s to enable a transaction.

What did the Supreme Court say?

That GPAs are not valid transfers of ownership. Only registered sale deeds are.

But it’s not with retrospective effect; existing properties that have been purchased from a GPA holder (before October 11, 2011) won’t be affected. Even those who hold a GPA today can “regularize” it by converting it into a sale deed, but they can no longer sell it to a third party.

According to a ToI article:

The verdict is likely to affect a large number of property owners. A senior lawyer who vets sale documents for a leading bank estimated that around 70% of property sales in Delhi take place through GPA and SA.

Apartment owners in societies which have not got a completion certificate will find themselves on a sticky wicket because these flats cannot be converted into freehold. Until now, these properties could be sold through GPA and SA. The new ruling will effectively mean such apartments cannot be sold. Experts also say the verdict will raise the market value of freehold real estate while depressing the price of leasehold properties.

The full order makes for great reading.

What should you do?

Just make sure when you buy a property that the seller had bought it from the previous owner through a sale deed. Make sure you speak to the person whose name is on the sale deed. (Not the person who signed – that is irrelevant)

If you’re buying an apartment, demand the ownership papers of the underlying land also. For under-construction apartments, these will be available – for others, you might need to get the documents from the registrar (I wonder if you can use an RTI request).

Note that you won’t get bank loans for GPA based property sales anymore.

This is a great order that should at some level curb the misdeeds in the realty business. We also need a proper real estate regulator and unambiguous property ownership laws.

I'm interviewed by Manish Chauhan at JagoInvestor on the Noida Extension issue. The Supreme Court's verdict to return Shahberi land to villagers has created a larger issue, with farmers from other areas demanding their land back too. Builders are playing truant, buyers are in a panic and the Greater Noida Authority is clueless.  As I had mentioned earlier, SBI had stopped lending in Noida, and banks in general got the jitters .

The Problem

• People bought under construction land in Greater Noida.
• From builders, who'd bought it from the Greater Noida authority.
• Which had in turn taken it forcibly from farmers.
• Saying that it will give it to industry, the villagers would get jobs, there will be development, etc.
• But it gave the land to private builders instead, for homes.
• The farmers complained to the courts.
• The Supreme Court said give it back.
• Builders had started construction, and had taken advances from buyers.
• Buyers have taken loans from banks.
• Now everyone's screwed.
• Even the farmer, whose land can't be tilled for the concrete that's in it.

What happens

The farmer has his land back. But since it will probably have to be rezoned as agricultural land, the farmers can't even finish the construction and sell the flats themselves even if they wanted to.  He can't till it. He has to hope for the builders to pay him directly, which I think will happen eventually.

The Greater Noida Authority is a shameless, faceless, corrupt entity that stole land and earned some money. But because they sold land cheap to the builders, they probably didn't make too much out of the game. They should be forced to compensate the farmers, but the cases will take years.

The Builders have promised that they might give either money back or allot flats in different areas. This is not going to happen; builders are in deep deep trouble anyhow, financially. Their only hope is to pay the farmers more and then take the land, but because they have got away with so much earlier, the thought doesn't cross their mind. They will demand a bailout, threaten to default, or otherwise shut down operations before eventually acquiescing to pay up.

It's not that they can't pay - it opens a can of worms. One builder pays, and now every farmer will demand money from builders even if the land sale was done through the Greater Noida authority.

The buyers are screwed. Banks are less screwed. Many buyers have paid just the advance - about 10-15% of the value - and taken the rest as a loan. Banks have probably financed the subsequent operation (that is, further payments will be made by the bank) which obviously are not forthcoming any more. 

Whose Problem?

Like I say in the video, it's always the buyer's risk. My father bought an under-construction flat in 1980. He got possession in 1991. There was no internet to complain. My dad went pillar to post, the builder DOUBLED the price and he had no choice but to pay or lose all the money he'd already paid. He had a housing loan at 18%. When he passed away in 97, we paid the loan back with his provident fund amount - inspite of nearly 17 years of paying, the loan was nearly 1.5 times the initial amount. I have had life easy; my dad suffered through the worst of property deals ever.

He never got a bailout and he never asked for one. My father knew his risk, and the property he bought is an incredible one, but he knew that he was lucky to have got it; every first allottee in that apartment complex knows that too. After that, I do not advise pre-construction properties to ANYONE.

The fault lies perhaps with builders and the GNIDA authority. Yes, some should go to jail. Yes, they should be forced to pay the buyers back. The court process might take care of that over the next few years. I just hope our government doesn't do a bailout; that would make people dumb enough to invest in more such property. Punishment is deterrence.

What Now?

Builders are doing weird stunts like posing as buyers to not pay up. (Many buyers were brokers anyhow, putting their commission largesse to work in the same business). There's a draft Land Acquisition Bill going around, but builders say that will increase prices a lot. (My foot)

Noida (as opposed to Greater Noida) has brokered some peace by offering farmers 5% of their land in developed areas; this applies to cases running from 1976. The Allahabad High Court has asked the GNIDA and farmers to attempt an out-of-court settlement by Aug 12.

Lessons

Don't buy under-construction properties. Even if they come with the seal of a public authority like GNIDA, you are at risk. It is your risk, so treat it like a risky proposition.

Do the due diligence anyway. Buying property is a painful business, and get as much documentation as possible from the builders, gathering as much history as possible. In boom times, they won't give it to you because there are other stupid buyers around. So don't bother during boom times, or go in understanding there is a big risk.

What else? Comment away. Here or at Manish's blog.

It seems banks are looking to approach RBI for a special dispensation for the money lent to homes in Noida Extension where the supreme court has said that the land should now be given back to farmers.

"We will need the regulator's indulgence on the matter. This is an extraordinary situation necessitated by court rulings," said the chairman and managing director of a public sector bank.

...

The article goes on to say  that the fact of nearly 70,000 apartments in Noida is uncertain, and that bankers haven't yet heard of defaults. That's because people are still hoping there will be a solution - if the builders ditch them, they will ditch the banks as well.

While the loan defaults are currently just around 1,000 cr. according to the article, it might get worse if builders themselves default. Which I don't get - how can builders get loans for the same land while selling it to people who have taken loans for, what seems to be, the exact same property?

Secondly, the RBI behaving leniently should be out of the question? Why? Because the banks see some losses, and want to hide them? If these are real defaults, banks MUST take them on to their books. We have seen enough leniency given during the economic crisis, and now it's becoming a moral hazard - for legitimate losses, banks are running to the RBI and crying "MOMMY".

Hopefully, RBI isn't like the US Federal reserve which is currently unable to respond because it is polishing the banks' shoes and will soon wash their clothes and put their babies to bed.

In a larger consequence, is this court judgement bad? or anti capitalist? NO WAY. This is basically affirming property rights. The GNIDA authority had no business acquiring land forcibly from farmers and giving it to builders. Tata has no business asking the West Bengal govt. to acquire land for the Nano plant. We need to have property rights enshrined in our constitution; no matter what, no one should be allowed to acquire land forcibly. Even for roads or such; the concept of eminent domain is reprehensible, and involves corruption (why a road over my land and not his?). We shouldn't let it happen.

Jerry Rao says it well in a piece in the IE :

The issue in India rests with the illegitimate definition of public purpose and the Machiavellian manner in which re-zoning (which drives up land prices) is done after the land has been acquired from powerless citizens at absurdly low rates. The proposed new law with endless arguments about whether forcible acquisition for a factory or a mall is in order after 70 or 80 per cent of the land has been acquired by the powerful corporation/ developer is a deliberate attempt to confuse the issue in order to continue to support crony capitalist behaviour. The only fair solution is to have an extremely narrow definition of public purpose and to re-zone land usage before so-called development activities are started, not afterwards. Better still, restore property as a fundamental right so that citizens can go to courts to fight an executive branch which is hand-in-glove with “citizens with disproportionate influence”.

Often, to figure out if a country is in a real estate bubble, what is measured is a price-to-income ratio. That is, a house price divided by the income of the buyer.

Typical P-I ratios, in 2007 in the US, went from 9.5 in New York to 6.2 in San Diego (and 0.9 in Detroit). The overall price to income index with a base of 1987, was at 1.6 in 2007 which has fallen to less than 1.1 (according to Calculated Risk). Consider that the base of 1987 means the ratio is a multiple of what it was then. (which I don't know)

Shanghai, in March 2010, was 27:1.

So price to income ratios can be confusing. Is 6 too high? Is 1 too low? But there is no universal answer. There is also no reason for there to be one universal answer.

1. Consider that houses are financed. Most buyers finance their purchases.

2. Consider that mortgages cost money in terms of interest and principal. This money has to go from a person's income - and he has to have enough left over to feed his family.

3. The term of these mortgages differs with countries; the US offers 30 year loans, India goes to about 20.

4. The interest rate is the most important factor.

The recent US mortgage crisis has made lenders wary of lending to someone where the monthly payment is more than 38% of the monthly gross income before taxes. In India, lenders stretch up to 40%, I'm told.

Now, let's consider a person earning Rs. 200,000 per month. This guy's rich.

Income: 200,000 per month

Taxes: 50,000 per month.

Mortgage potential: 80,000 per month. (at 40% of monthly income).

He's left with Rs. 70,000 which, because he's rich and can afford it, spends much of it.

But what kind of house can you get for Rs. 80,000 per month? Assuming rates of 12%, the maximum loan of Rs. 72.65 lakhs. At a 20% downpayment the house can cost Rs. 90.6 lakhs.

This is a price-to-income of 3.77.

If Interest Rates go up to 13%, by the same calculation the highest price one can pay is Rs. 85 lakhs, for a price-to-income of 3.56. The P-I ratio changes based on mortgage rates and terms.

Now consider you're not that rich. A person earning about 50,000 per month can't really afford to pay 40% of income, because after that and taxes, what's left over is too little. With the the P-I ratio will further reduce.

I don't have a definitive source for Price-To-Income ratios in India but in the outer edge of Gurgaon, they seem to be around 5. A lot of these houses are speculative (i.e. not financed) and run with black money, but at some point, the greater fool will need to have a bank loan. It seems like an enormous bubble to me - especially as similar ratios in countries with much lower mortgage rates resulted in a bust. We're even more stretched.

After a verdict by the Supreme Court that made some of the Greater Noida land acquisition illegal, SBI and other banks have stopped lending to real estate in the region.

DNA says 6,000 buyers are impacted. Many will move to other projects, yet others will be desperate to get back their money. I wonder how many projects actually started out (so that the banks will be impacted). Banks usually don't lend the first "advance" for a house, that's usually part of the down payment. Only as construction begins and slabs are created, is money released to builders. So if this was barren land, banks shouldn't really be impacted.

Having said that, if this is a precedent to go by, then other farmers in projects that are further downstream in terms of development might go to court and win. That will hurt the system a lot (and it should). The government has no business acquiring land forcibly, regardless of acts. In fact, there shouldn't even be a distinction between agricultural and commercial/residential land. A farmer should be free to sell his land to a developer directly.

In a way this decision is very good; it protects the right to own property. For those thousands who bought in, I feel bad, but that's the risk when you buy a property before it has been constructed.

After years of housing prices gone wild, China's property bubble is starting to deflate.

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

...

Already, in nine major cities tracked by Rosealea Yao, an analyst at market-research firm Dragonomics, real-estate prices fell 4.9% in April from a year earlier. Last year, prices in those nine cities rose 21.5%; in 2009, the increase was about 10%, as China started to recover from the global economic crisis, with much steeper increases toward the end of that year.

You must watch this awesome visualization and videos by the WSJ on China's popping bubble, and how it evolved.

According to the Economic Times, though, India's doing very well: Property Prices in Delhi are up 10-45%

Property prices in the Delhi NCR region have escalated between 10-45% in the last one year, says a study by real estate portal 99acres.com. This increase in prices indicates that the sentiment in the sector has improved drastically since the slowdown. 
...

Recent months have seen a slowdown in demand for homes, bringing down sales volumes dramatically. One of the main reasons for this demand slump is the increase in rates across the market, especially in Noida and Gurgaon, along with climbing interest rates.

Areas in Gurgaon saw the highest level of property price appreciation in the NCR. Between Q1 2010 and Q1 2011, the per square feet prices of properties on Sohna Road were up 46.1%, DLF City Phase 4 were up 41.9% and in Sector 57 were up 37%.

I have known of transactions in Sohna Road that were up 25% or so. But I doubt it lasts, or that it only "stabilizes".

My housing loan is being disbursed in stages as my house is getting complete. My bank charges me only the interest until I get possession. Can I pay the Full EMI instead?

Of course you can. Banks don't want you to, largely because it increases the total interest you have to pay.

Banks disburse loans in stages during the construction, and your total loan amount keeps going up. Initially, the loan amount is small, and you are charged only interest, so you get to pay a small amount. But you are likely to be able to afford a larger amount, and where you can so afford it, you must pay back. Doing so will reduce your principal, and a lower principal means a lower interest payout.

Calculations

Let's compare.

Assume both people below take a 40 lakh, 20 year loan. Construction for 2 years, loan is disbursed at 20% every six months, with 20% upfront. Loan interest rate is 10%

Amit: Pays only interest during construction.

Yousuf: Pays full EMI through and through.

Instead of boring the life out of you with figures, I have graphs. Nice lovely looking graphs.

First, the way principal is repaid:

Yousuf takes 188 months to repay, which is about 16 years.

Amit takes 264 months or 22 years. That makes sense - his 20 years begin after construction is done.

Now the boring graph of how much interest is being paid.

The bank loves Amit for paying 56.64 lakhs. Heck, they might even ask him out to a Golfing event, and give him a lovely wall clock with the bank's name inscribed, so that he can get his friends to take a loan.

Yousuf on the other hand pays just 32.12 lakhs. He won't get a silly wall clock but he thinks the 24 lakh difference can buy him a lot of wall clocks. With no advertising.

Hey wait, what about the time value of money?, asks the MBA type. Obviously since Amit is paying over a longer time, won't the value of money be lower in later years, because of inflation? I mean if Yusuff pays more today, that money is more valuable than Amit who pays more tomorrow?

Good question. While money is money is money, it's useful to see if there's still an advantage if you consider inflation will reduce the value of money in later years. After all, a Rs. 1000 paid today hurts less than Rs. 1000 paid in 2001.

So let's provide for an inflation of 8% a year, and then "value" the future cash outflows by lowering the number of "today's rupees" that it costs.

(Assumed 8% inflation or "discount rate")

As you can see, there's a Rs. 10 lakh difference, in favour of Yousuf. While Amit pays Rs. 31.7 lakhs, Yousuf pays just Rs. 21.2 lakhs.

Taxes

There is a difference in "current" taxation laws. In a Pre-EMI situation, all interest paid prior to construction is deductible from tax, but not when you pay it. All such interest is added up to the possession date, and then that amount is divided into five equal installments, to be deducted over five years.

In any year, this interest deduction, for self-occupied property, is limited to Rs. 150,000. (Under current laws)

For both Amit and Yousuf, interest paid in years 3 to 7 (the five years after possession), is already greater than 1.5 lakhs per year. So both of them get NO additional deduction for pre-EMI interest.

On the principal front, the amount deductible is a sum total of Rs. 100,000 for housing loan principal. This is not applicable on the principal portion of the full EMI Yousuf pays. But since the current limits are 100K for principal, and the principal repaid by Yousuf from years 3 onwards (when even Amit gets deduction) is greater than 100K per year, there is no added benefit for Amit (or, in that vein, a disadvantage for Yousuf).

(See Section 24 of the Income Tax Act)

Things may change once the DTC comes into effect. (For example, the current draft of the DTC provides no home loan principal deduction)  Therefore I wouldn't do anything differently based on tax law.

Practically, you can afford the Pre-EMI today. Why do I say that? Because if you couldn't afford it, banks won't give you the loan in the first place.

So just pay the Full EMI.

But if you ask me, I would completely avoid buying under-construction properties; it is not worth the pain.

Rohit Prakash, based in Austin, Texas , has for long been doing brisk business helping Americans and foreigners buy and sell property in the capital of one of America's biggest states.

Recently, he set up American Full House to cater to Indians looking to buy homes in locations that have seen a huge price drop. An Indian buyer who contacted him sometime ago is close to doing two deals in a suburb of Los Angeles at $82,000 and $85,000 each for a three-bedroom condominium. At the peak of the housing boom, these properties were selling at close to $250,000.

A 3 bed flat at $82,000 near Los Angeles? That's about Rs. 35 lakhs. In comparison the apartment I live in (I rent) is at the outer edge of Gurgaon and sells for 1.2 crores, for a 3 bedroom.

I couldn't find anything of that sort on Craigslist for California, but I saw this house - a 1400 sq. ft, 3 bedroom house on a 7,500 ft lot at El Monte for $289K. That, in comparison with the 2 cr.+ ticket size for that kind of land (house or no house) in NCR (and the same for most of developed India), is cheap.

Expect more of this as US prices come down; that Indians will consider buying. Of course, the rental yields don't make sense for India, but we are very big on capital appreciation. It would make a lot of sense though to set up a fund that will buy and hold such properties, perhaps next year. Gives me ideas!