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The Housing Price Conundrum

>> November 4, 2011

We are seeing that housing prices are increasing with fast rates. When we compare real estate industry with any other industry, we find very high growth in this industry due to rising of the housing prices. This is a very complex conundrum. Today, we are trying to understand this housing price conundrum.

In India, if we trust on first housing index of National housing Bank, we see that the housing prices have become doubled with in 4 years ( from 2007 to 2011).

Some cities of India like Chennai have crossed 100% increase. 

There are lots of factors of increasing the prices of houses. 

1. Increasing of Population 

Increasing of population is direct new demand of houses. More India's population will increase, we need more houses to live. But total land of India is not unlimited. So, all those who want to sell will their own price. They always want to get more value of their house if they will sell. This trend increases the housing prices. 

2.  Per Capita Income 

Per Capita incomes means earning of every single person of India. Very few Indians income is in millions and very large Indian's income is very low. Due to this, our per capita incomes shows opposite result. In reality, per capita income is increasing very low rate. But they need also houses to live. So, capitalist's best way to exploit poor Indians is to increase the housing prices.

3. Increasing of Supply 

If a capitalist of India has money (black), what will he do? He will buy land or property at any cost and then sell it at higher price. Even after the incomes are low. Due to this, they demand less. But supply of new houses are increasing very fast rate. At that time, houses are sold. Will it decrease the housing prices. No, it will not decreases the housing prices but it will increase the housing price because they have to get minimum return on the investment of production of new houses. Suppose, one capitalist invests Rs. 200,00,000 in housing. But no body is buying same houses after construction at Rs. 300,00,000. Suppose, he could not sell a single in two years. Now, you can tell me who will give interest on Rs. 200,00,000. Answer is no body. So, he will do his business with patience and will increase the prices of his housing. He may sell his houses on financing basis or any other way but he will not decrease the prices of his housing building. This is nature of human being because housing building can be used by 100 ways. He can give it on rent. He can make his warehouse in it. He can use it for his any other business. 

5. Mortgage on House 

You know that house rent is always more than interest of mortgage on house. So, this is helpful to increase the houses prices. If a person who has made house but due to not sale of this house. He can suffer money problem. For recovering his money problem, he can get mortgage on house. For this, he has to give interest which he can easily cover by getting rent before selling the same house. This factor encourages property deal to increase the prices of houses. If he need more money, he can get housing equity loans instead of selling his house at low price. 

6. Rent Rates 

One of important content of Wikipedia "Real estate bubble" states that there is big effect of increase of rent rates on the increasing of the prices of house properties. For this, we have to learn house price - earning ratio.

\mbox{House P/E ratio} = \frac{\mbox{House price}}{\mbox{Rent} - \mbox{Expenses}}

We also study Gross Rental Yield 

\mbox{Gross Rental Yield} = \frac{\mbox{Monthly Rent x 12}}{\mbox{House Price}} \mbox{ x } 100%

If rent rates are increasing, it is the chance there will be more investment in this sector for getting high return. This will create a trend and prices will increase like bubble.

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optimia dev January 17, 2014 at 12:57 AM  

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