Saturday, September 29, 2007

Are NRIs buying up all the houses?


In my house search I frequently come across realtors who claim that NRIs are willing to pay much more; and that is the reason why prices are going up.
There are several urban myths about the current rises in real estate prices in Chennai - you have all heard of them. Someone says that a friend of theirs went to book an apartment on the FIRST day of booking. The apartment was in Siruseri or somewhere in a 18 floor building. And by the time they reached the booking office all the apartments were sold out except for one in the 18th floor.
This kind of story is so common - 6 months back I was told that an apartment in Santhome costs 1.1 crores!
My wife called up a builder's office and she made the mistake of opening the conversation in Tamil. The immediate response from the builder - "You cannot afford it". No price quote, nothing - just you cannot afford it.
In my investigations to see if ANYONE is paying 1.2 crores for an apartment in Adyar, one group was always blamed - the NRIs. The realtors will talk to me with mournful faces and describe how the NRIs are able to pay any kind of money and thus us idiots in India can never buy these.
Unfortunately, I was an NRI till last year - to me it is obvious these people are bluffing. In the latest Tamil movie Shivaji, Rajni returns after 10 years in the USA with 250 crores! Is this really possible? Is it true that NRIs in the USA are so extremely rich, ready to blow their money on apartments?
(In this article I am analyzing NRIs in the USA alone - because they form one of the richest groups and thus I am safe analyzing them).
Let us look at the US census for 2000 and the American Community Survey. In 2005, there were around 2,319,000 Asian Indians in the USA. They form the richest minority in terms of median income. On an average, the monthly salary of an Asian Indian is $60000.
If you are in IT, your pay depends on your years of experience and the number of years you have been in the United States. Many MS students get around $60000 - $70000 when they start. If you are consulting your rates can vary from $35 (when you are starting up) to $70. Your rates also depend on the region you are in - if you are in New York City or in Bay Area, California, you are likely to charge much more. But your living expenses and the tax you pay are also very high in that case.

After taxes, you are likely to be saving around 6-7 lakhs per year - if you are living a normal life style. If you have kids, that savings rate will go down.

The emphasis here is that an Indian in IT in the USA is not super rich. Whether you are consulting or you are a permanent employee does not make a huge difference.
Of course, if you are an MBA from Wharton, the story is entirely different - you can earn a lot. But then you are stuck for 5 yeears or more paying off the student loans.
That is why the rate of savings I mentioned above is pretty much the standard for an IT employee - 5 lakhs if you are normal to 9 lakhs if you live shoestring and are a bachelor.

Now let us say I have spent 5 to 8 years in the USA. I have saving of around 25 lakhs to 60 lakhs. I plan to buy a house in Chennai. Would I buy the 1.2 crore one in Adyar or even the apartment in Siruseri?

Unlikely. The reason is that NRIs are as conscious about their investments as a resident of Chennai. For 1.2 crores, I can buy a good condominium in downtown Boston or Philadelphia. To imagine that Chennai as a city with no public infrastructure and no standardized property rates and even less security can command such a price is absurd. If I am an NRI and I see that I could be paying the same price for an apartment in Chennai as I am in Philadelphia, I would buy the one in Philadelphia.

I have always suspected that the NRI rationale given by realtors is a smokescreen to keep hiking their prices. None of my friends in the USA have bought property in India. If I was still there, I would not either. The problem is the realtors know that nobody is going to actually fact check their stories. Do people really believe that NRIs are ready to blow their money on crappy houses in Chennai?

The issue is also that as a very intrusive culture, Indians make it a matter of habit to be familiar with other people's pay. But, because of the prestige associated with being an NRI, nobody really reveals what their pay is in the USA. Even if your pay is high, you got to live there - and you got to spend money there. Thus people are completely unaware of the true savings. NRIs are not living in the USA JUST for the savings. There is also a quality of living that you pay for and enjoy.

This is ofcourse not true for everybody - there are a few who strike it rich. But if they do, they prefer to stay there.

One related issue is that people see a reason for this insane rise in real estate costs - they say, "Oh, this is India Shining, of course! When the economy grows, this is what happens!". That is, they say that we should all be happy about this because what is happening is a natural consequence of our economic growth. Is this true?
There is no direct correlation between a growth in economy and real estate prices - in the USA, during the recession from 2001 - 2004, real estate prices were actually going up! That is, even though the economy was down, property values were increasing. The reverse is happening now - even though the US economy is doing well, real estate is going down.
Even in India, the total growth in economy over the last two years is around 15% -meanwhile real estate prices have doubled - that is a 100% increase in costs for a 15% rise in GDP. What sense does this make?

The truth is that realtors are completely speculating and randomly pushing up the costs - while blaming the economy or NRIs. A speculation driven cost rise is nothing to be cheerful about. We need to understand that Markets require regulation - and the Indian state is really weak in regulation.

16 comments:

mukund said...

nice article...

angelvc said...

This is exactly what I see and feel since past 6 months. Great article. The failure in regulation of Real Estate price and un-limited FDI's in real-estate is causing great pain for all Indian citizens (including NRIs). After 8 years being an NRI, I still cannot digest the high price of real estate in India. It is painful and unfairness towards common man. I wish for a step change in current real-estate price hikes.

Maheswari said...

HI Ram - I agree your views on absurd price of real estates here. But what i differ from your view is inspite of such high cost it is not builder who gets large chunk of the money. Being built a house on own recently [in the same IT corridor] and having builders and contractors as my relations [they own firms in andhra and chennai] i can vouch that only a decent profit remains with builder and the rest goes to our corrupted society [govt departments,sub contractors,local boards etc]. I really shelled out lot of money for building a small home but most of part went to undeserving set of people instead of people who really slogged!!

Anonymous said...

On an average, the monthly salary of an Asian Indian is $60000.
??
720000k a year?
I guess even sivaji made less..

Ramiah Ariya said...

Anonymous,
Thanks for the correction - I of course meant yearly.

crsathish said...

pretty good article sir...

srik said...

Hi Ram Sir , good one ... may be india has 1/5 of the land and 3 times the population of US , my be more demand is there but as you said the price hike is not real ...
hope some news paper picks this article to show the reality of real estate

Anonymous said...

This makes good argument why the real estate price is going up with out good infrastructure and facility. Is it really a growth or bubble that realtors are making it.Actually I was searching a plot in chennai year back(finally I gave up), the broker I was talking was expecting profit Rs.30K for Rs.300K plot which is 10km-15km from Medavakkam.Does people either NRI or working in India have really that much money like 1crore? Say two working in s/w and earing average 40K/month(80K for both) and they can pay EMI of 50K/Month.If they get an onsite oppertunity and if they are going to be there for an year they can earn atleast 15lacs/per year. So It saves the tax and also the investment.So they are large pool of people are there to think such way.ultimately, we need to be part of the bubble/growth. i am pretty sure that the prices are not going to come down in near future.

Shambo said...

Good Article...

Politicians,Business Guys(who earn a lot and pay less tax) and all Brokers are responsible and Some idiots who fall in their way without looking any details..

raju4u said...

But Still houses/flats are being sold for 1 crore and more....
so who are all buying?

Anonymous said...

This article is absolutely true. I'm an NRI who is trying to find the real reason. Frustrated if we are missing anything in Chennai.

Anonymous said...

Very well written article! It is so unreal which is happening in india right now. I still wonder how it is all working out...

Is it just real estate folks and brokers or somebody else who is making this bubble?

Anonymous said...

If you can afford it, then buy it.
Otherwise shut the fuck up.

I am 27 years old. Own 2 houses in the US, two in Chennai and one in Hyderabad.

I made it, because I worked hard for it.

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