Rajiv Sethia

Invest Globally, Not Just Locally

Just to add to the fine commentary above - we should not forget these are volatile markets that are still at historical highs despite the recent correction. The bracketing of these together is a myth spread by Goldman that the popular media has been quick to jump on. Each of them is a completely different animal: considering politics, the economy, and the stage of human development. Despite a common market uptrend in the past decade these do not share much else with each other - which may be a good thing as uncorrelated markets are difficult to find.

The "demographic inevitability" isn't inevitable, just as it wasn't for most of the two centuries prior to the last 20 years. Weak institutions, fickle economic policy, political challenges, societal strife (particularly India and China) and governance issues can still trounce sound economics quite easily in each of these countries. Exchange controls over capital flows make true asset pricing difficult. But I do agree with the author that these may represent good diversification opportunities for a mainly US based portfolio.

India's Exploding Real Estate Market: Shades of the Florida Condo Bubble

10% growth, 15% salary growth, top 1% making more than $200k - none of these arguments justify the prices that we see in India. No matter how you look at it, India is still an incredibly poor country. On America's east coast, every tom dick and harry you see on the train makes more than 200k. 8.5% of US households have a networth (net - ie after deducting all loans) exceeding $1m, and 1.3% with wealth exceeding $2.5m. Still that does not cause New Jersey land prices to come even close to India.

There are serious short term factors at work here - the lack of good title to properties is a serious problem, for example, you can't think of buying a property in most of Karol Bagh, Chandni Chowk, west Delhi, much of South Delhi too because you don't know how many claimants are there to the title. So you can only go to the new developers like Ansals, DLF and others that give you a clear title. There is certainly a demand unmatched by supply as houses can't be built overnight, but supply is responding to the demand & it remains to be seen what happens in the next 3-4 years. Increasing urbanization is a factor but I don't believe the rural masses moving to the cities are bringing the kind of money these houses demand.

There is another issue I am still unsure about. In the US, foreclosure laws are well established and the procedure is followed. In India, if you default, and if the lender takes you to court under civil law, he has no choice but to wait for 5 years for the case to come up for first hearing. So it will be interesting to see how that one unfolds when people start defaulting (which is statistically inevitable, no matter how rich India is compared to the US ;-), as is the argument I have heard made by some.

But one can analyze to one's heart's content, the market is what the market is, and the fact is that these are the prices. In 2004 I looked at an apartment which then was 1 crore rupees in Noida near Delhi, and today is more than double that. If I wish to buy something I would be comfortable with for my family, that would currently cost nothing less than half a million dollars. I don't know how the guys in India manage that kind of money, or the courage to take on mortgages whose monthly payments are in the $3k a month range with an Indian salary. Someone I put this question to said there is no dearth of the newly rich who work for Infosys, Daksh and many others and whose share options have made them dollar millionaires. Maybe I & Anshu missed the boat. Ten years ago when I was in Thailand I was shocked to see million dollar condos there - maybe these prices are par for the game in developing countries. The bubble may just stay the same or shrink a bit instead of bursting because when prices go down, the property markets just become shallow and deals stop happening, and declines will only happen by the effect of inflation while nominal prices hold. Who knows.

India's Exploding Real Estate Market: Shades of the Florida Condo Bubble

There is going to be a lot of pain when this is over. There are more high income earning people in New York/New Jersey than there will be in Gurgaon/Noida in the next 50 years even with double digit GDP growth, yet New Jersey is far cheaper than any place in India. It seems unsustainable so it must stop. The only NRIs who can afford apartments in India now are the i-banking/private equity/hedge fund types, the regular IT guy or the doctor or the engineer doesn't stand a chance of sparing half a million dollars I am sure. Yet, I have been proven wrong in the past and I don't believe my own forecasts anymore - I did not buy in 2004 when it looked similarly overpriced, and today things are just unaffordable. Certainly the market knows something I do not, and I am certainly not wiser than the market.