Who really made a fortune from the 2002-2007 Real estate boom?

Do you think it's the IT professionals who made merry in the 2002-2007 IT boom? Well, I would say 'Yes', if your question was about who lost their money!

Let's get a bit deeper in Chennai. When the boom happened, people started buying lands, apartments and homes both within and outside the city. But if you look at the volume of transactions that happened within the city and outside the city, suburban transactions are 400% more than the former. (For this comparison, I considered only places within 45km from Chennai, leave alone the investments that have gone into smaller cities!).

In their quest to own a piece of property, affordable IT professionals lost their money to people who owned these land pieces (of course with the help of banks). So thr IT professionals have spent their money and it's the seller who actually gained. They not only lost or spent their 'possessed' money but also their future savings!

If you argue not everyone bought land parcels, think how builders get lands for apartments?. Except very few builders who had huge land banks in suburban areas, most of the builders bought lands during 2002-2007 period. So, the builders too, have actully spent!. They made a killing profit both from top and bottom, but again, most of the builders have re-invested in land banks again in the assumption that real estate bull market would last forever!.

So, who actually gained? Now, who typically owns lands in areas 45km away from Chennai? Well, lower middle class people (no way related to IT), small business people, brokers and very few farmers. These very people are those who made a killing during the boom period. I mention 'very few farmers' because most of the farmers did not have any understanding of the boom and so gave Power of attorney to brokers, who could see both the unsuspecting farmers and affordable buyers. Pity, many of the farmers who gave PoA to brokers did not even know how much their lands were sold for!

However, this money flow itself is not unique in India. Infact, its a well known real estate phenomenon called 'Gentrification' which means 'affordable people displacing the less affordable ones'!
So, if you track the money flow, its from 'outside' clients (US, Europe, and middle east)-> Builders -> Brokers -> Small business people, lower middle class people and farmers.

Good for the society, as money spreads to all strata! But, bad for the govt, as many of these people neither pay Income tax nor register the property at the market value (thus generating huge black money)!

Count down starts- Indian Real estate all set for a crash

Indian Real estate market is all set for a crash, a spectacular one, that is! Let me give you some prominent reasons, why its going to be spectacular, the kind one has never seen before.

Who typically buys apartments, homes, land here?. Leaving out the exceptions, its mostly driven by Indian Software Engineers, who normally earn 2-3 times more than their non-IT counterparts. Engineers who join a company when they are between 21-25 years, make up the 10-15% down payment needed for buying an apartment in 2,3 years. Banks used to hunt them to give Home loans at attractive interest rates. This phenomenon gained momemtum in the 2002-2003 period when the US economy started picking up after the 9/11 attacks and then came one of the biggest booms, we've ever seen.

By 2004-2005, I knew so many bachelor IT professionals in Indian metros who owned their apartment. By the later part of 2005, so many speculators (who buy apartments, land parcels and make huge money just by flipping the properties to someone else) had already entered the Indian RE market. All of us have seen where the Indian RE prices were taken to in 2006 and 2007. Now the important question is why can't the same story happen again and why the drop is going to be spectacular?

Well, the very IT people who would or could fuel the property purchase and drive growth in the coming years are wiped out. They were not generated this year, and wont be, in 2009 and 2010 too! Look at the projected drop in IT hirings. A survey by India Today says there is a drop of 83% on the future IT hirings from the planned levels. If apt buying IT professionals are not generated in 2008 and 2009, then who will buy apartments and Independent villas in 2011, 2012, 2013?

Now to get the whole picture of it, Textile industry has planned to drop hirings by 51%, Retail by 78%- these were the very 'new age' opportunities in the recent times with the promise to create more 'wealthy' people. So, if fresh apartment buying people are in scarce, the demand will be skewed. With banks already starting to twist-arms of the construction companies, the panic selling will start. Builders will start selling apartments at whatever costs they can.

Now, add to that the entry of 'defaulted properties' which were previously bought by those who thought they could afford it. But with either job losses or price correction (that is, when the pending loan amount is bigger than the price depreciated apartment)- they will stop paying the EMI, making the banks take over the defaulted property. This process, under SARFESI act, will take between 18 months to 2 years. These apartments will come to market at an attractive price than their new counerparts, thus pulling down the prices.

We are essentially in a downward spiral, with each factor pulling down the other and getting pulled down in the process, leading to a spectacular crash. Now, what should one do in this crash?

Follow the age-old tradition of 'Saving for the rainy day'. Then wait for RE buying signals, like Rent-to-EMI ratio or rent-to-cost ratio. While experts are predicting return of bull phase in RE market by 2010, my guestimate says Indian Real estate is essentially in a bear grip that might last for a minimum of 3-4 years.