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Sunday, August 12, 2012

Is Gurgaon Dwarka Expressway a Bubble Ready to Burst?

After reading about Gurgaon Dwarka Expressway a lot in the newspapers, I decided to explore the Gurgaon Dwarka Expressway area to find out the answers to certain questions in my mind:
  • Does it make sense to buy a house in Gurgaon Dwarka Expressway area?
  • Is it worth putting one's money in buying a house in Gurgaon Dwarka Expressway area ?
  • Are many people really buying houses in the Gurgaon Dwarka Expressway area?
So is Gurgaon Dwarka Expressway a bubble ready to burst? The answer at this point seems to be a big yes. Just read on.
    Gurgaon Dwarka Expressway Area

    For getting answers to the above questions I spent the last few weeks driving through the new sectors on the Gurgaon side of the Gurgaon Dwarka Expressway area to understand its layout. The whole of Gurgaon Dwarka Expressway area can be divided into five parts:
    1. Area close to Delhi (Sector 109, Sector 112) - these are being sold with the USP of close proximity to IGI Airport and Dwarka
    2. Area opposite to Palam Vihar on the other side of the Delhi-Rewari railway line (Sector 102, Sector 103) - these are located close to Rajendra Park
    3. Area opposite to Sector 9 and 10 (Sector 37C, Sector 37D) - these are close to Basai  area
    4. Sectors on the right side of NH8 when going to Jaipur from the Kherki Daula Toll Plaza (Sector 84, Sector 89, Sector 90) - these are running close to the road going towards Pataudi
    5. Sectors on the left side of NH8 when going to Jaipur from the Kherki Daula Toll Plaza (Sector 79) - these are towards Faridabad side in close vicinity of Aravalli Hills
    Does it Make Sense to Buy a House in Gurgaon Dwarka Expressway Area?

    No, not at all given the rates which are currently being quoted. It appears there are no affordable projects in this area. All projects are claiming to be luxurious and the current BSP rates start from Rs 5000/- to 5500/-. For the high-end projects the target market consists of high net worth individuals for whom a few crores here and there doesn't matter hence the contents of this post may not be fully applicable to this segment.

     It would be fair to say that a normal end-user would want to buy at least a 2 BHK. For a 2 BHK of 1500 sqft the basic cost starts from 75 lacs and after considering the additional charges (EDC, IDC, Parking, Club, PLC, etc.) and stamp duty the cost will easily touch 90 Lacs to 1 crore.

    Surprisingly there are many builders who have come in to "make hay while the sun shines". I came to know about an inverter manufacturer planning to come up with a housing project. There is a possibility that many of these get some bookings done and sell the project lock, stock and barrel to another builder and there is no guarantee the other builder won't do the same. For end user this may mean inordinate delays.

    Is it Worth Putting One's Money in Buying a House in Gurgaon Dwarka Expressway Area?

    No, not at all unless you are an end-user who bought it when the BSP was Rs. 2000/- to 3500/- or purely an investor who has put your money when the rates were even lesser and has enough cash to stay in case resale takes its own sweet time. Or handle the worse possibility - to buy and keep the house in case no resale occurs. With this area this is a very real possibility. We know that when demand goes up prices go up but when prices go up many people who could afford an item earlier drop out leading to demand flattening which again brings prices down.

    For the salaried class who pay taxes to the government honestly at source itself (through TDS) unless one is earning more than 25 lacs in a year buying a house in the Gurgaon Dwarka Expressway area will be next to impossible. For details see the section "Some thoughts for End Users of Housing Projects".

    Are Many People Really Buying Houses in the Gurgaon Dwarka Expressway Area

    No, not at all despite the claims made by the builders and even newspapers and many news channels. In the Gurgaon Dwarka Expressway Area mostly investors have put in their money expecting to make a kill when rates go up. It is a fact that prices can't go up indefinitely (other than to account for inflation factor).

    Imagine an investor with 1 crore who invests in four houses at a rate of X0. The investor would typically follow the strategy as below:
    • Sell the first house when the rate is X1 (>X0) - profit is on the differential X1 - X0
    • Sell the second house when the rate is X2 (>X1) - profit is on the differential X2 - X0
    • Sell the third house when the rate is X3 (>X2) - profit is on the differential X3 - X0
    • Sell the fourth house when the rate is X4 (>X3) - profit is on the differential X4 - X0
    The total profit is expected to be X1 + X2 + X3 + X4 - 4X0. This calculation makes a major assumption that the investor is able to make a resale. Also consider the number of people who can afford the house as N0, N1, N2, N3 and N4 when the rates are X0, X1, X2, X3, X4 and X5 respectively.

    It is obvious to note that: N4 < N3 < N2 < N1 < N0. Now think what if N1, N2, N3 and N4 are close to zero (meaning there is demand but no affordability in the market - people want homes but can't afford if X0 is very high).

    Some thoughts for End Users of Housing Projects

    Imagine an end-user who wants to buy a house. It can be assumed that an end-user will come in only at the rate of X1 or higher. Supposing the end-user has 20 lacs in savings so to buy a 1 crore house she will need a loan of  80 lacs under CLP (Contruction Linked Plan). In any case banks don't fund more than 80% of the total cost. For 80 lacs loan at a rate of interest of 11% the EMI for 20 years comes to Rs 82575/-.

    Now assuming banks are ready to allow EMI upto 50% of her take home salary. This means the end-user should be earning Rs. 165150/- every month which translates to an annual take home salary of around 20 lacs or annual total salary of 25 lacs. What percentage of end-users come in this income bracket? What about the uncertainty due to weak market conditions? What if after taking loan an end-user suffers a job loss?

    So if you are an end-user stay away unless you are prepared for the long haul - spending 1 crore for a 2BHK. The other risk is if the investor can't make a resale the builder won't get the money to carry on with the construction. And even if the builder could, it won't because there is demand but no affordability in the market so no buying would occur until prices crash and that makes the project commercially nonviable.

    End-users should also not take the risk of becoming an investor to make a quick kill as this can backfire. I suppose investors will be willing to have their money forfeited by the builder than pay more if the resale doesn't occur by a certain time. An end-user turned investor can't afford to have the money forfeited as their money will be hard-earned unlike the case with investors (who generally have lots of unaccounted money).

    Learning from the US Sub-prime Crisis

    The US sub-prime crisis had its roots in a situation like the growing bubble in the the Gurgaon Dwarka Expressway area. In the case of the US sub-prime crisis housing loans were provided to those who couldn't really afford them.

    Whereas in this case other than projects that were sold when the BSP was Rs. 2000/- to 3500/- most of the projects will stall mid-way  due to defaults by investors (who will stop paying) resulting from lack of end-users (who won't be able to afford the houses). This will naturally lead to inventory pile-up leading to a price crash.

    Those who don't want houses, have them (Investors - for them house is a means to make money) and those who want, can't afford them (End-users - for them house is a means to satisfy the basic need of shelter). We all know no one is able to buy something is equivalent to no one wants to buy it and in that case prices do crash.

    So is Gurgaon Dwarka Expressway a bubble ready to burst? The answer at this point seems to be a big yes. This is highly unfortunate since many needy end-users finally get adversely impacted.

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