Kochi real estate market - Down but not Out. Fears of a bubble still strong.

If the statistics are to be believed, the real estate market in Kochi has seen a declining trend over the last 3 quarters starting June 2011. The drop itself is a staggering 32% over the quarters from Apr -Jun 2011 to Jan - March 2012 (data below) as per the RESIDEX index.  This also raises alarming noises amongst a section of the populace, who feel the real estate bubble in Kerala and specifically Kochi might be about to burst. The significant price correction along these lines in Kochi, can in no way be correlated with other 20 odd cities in India, some of whom have shown considerable growth over the same period for e.g. Chennai and Delhi.

NHB Residex is a housing index and first of its kind in India, provided by the National Housing Bank (which is wholly owned by RBI) on a quarterly basis. The objective of the index was to provide transparency to the real estate market in the medium to long term. The index tracks residential price movements and is currently available for 20 cities in India and is proposed to be expanded to 63 cities, covered by the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The index currently has a lag of about one quarter in providing data about the real estate market pertaining to a city.

As per the National Housing Bank "Actual transactions prices are considered for the study in order to arrive at an Index which will reflect the market trends. Primary data on housing prices is being collected from real estate agents by commissioning the services of private consultancy/research organisations of national repute; in addition data on housing prices is also being collected from the housing finance companies and bank, which is based on housing loans contracted by these institutions." 

In compilation of NHB RESIDEX the cities have been suitably stratified by administrative zones or municipal wards according to availability of the data. The sample size of price observations consists of 500-600 observations for each city. The index is computed by using Price Relative Method (Modified Laspeyre’s Approach). Under this method price relatives are calculated only once (at the basic stratified unit) and the weighted average of these price relatives leads to the index at next level. (Source: Hindu)

 Source: NHB Residex

 So how does one interpret the NHB Residex. The index is currently fixed with the year 2007 as the base and base index value as 100. If the value in Bengaluru was 100 in the previous quarter and 92 in the current quarter it shows an overall drop of 8% in real estate prices for the quarter.

DRILLING ONE LEVEL DEEPER INTO THE KOCHI REAL ESTATE DATA
 

A further drill down into the data provided by NHB on the Kochi market by locality is given below. As per the data, Fort Kochi Vili, Karugapalli, Vennala & Mammankalam has seen the biggest drop in real estate prices in the last quarter of around 23.75% (From 80 to 61) followed by Mattancherry, Chakkamadam, Cherralai; Panayapalli & Edakochi South which has seen a 20% drop in real estate prices.

Possible reasons that could be attributed to a slump in property values in Kochi are:

1. Slackening of demand due to high interest rates and inflation

2. Property rates hitting their peak from where they have started going downwards

3. Postponement of decision to purchase property on the part of the buyers

4. Oversupply of inventory and less sales velocity (number of units sold vs. number of units created)

5. Drop in speculative investments by HNIs and NRIs prompting a correction

CONCLUSIONS

Although the NHB data provides a good indication about the state of the market, it predominantly covers transactions which involve financing institutions. Thus a complete picture cannot be drawn from this data alone. Also since NHB looks at the overall market, there is no clear indication if specific segments like luxury apartments, villas have been more affected compared to budget properties which trade in the 30 - 60 Lacs bracket. 

Our recommendation for investors looking at Kochi as a property destination, would be to "not resort to speculative buying".  Since most fundamentals in Kerala for Kochi and Trivandrum are still strong, segments which have seen drop in property rates in Kochi, could further see a drop till the demand - supply mismatch is rectified.

Some protagonists also argue that the overall Kerala market is a real estate bubble waiting to burst. The NHB residex at present does not cover other cities in Kerala for us to compare if the Kochi phenomenon is something felt across Kerala. Going by the request of many of our customers, we are going to showcase an article about the so called housing bubble in Kerala and examine whether it is truly a reality or just a figment of somebody's imagination. 

You can write to us with your comments, suggestions or requests for any specific information on Kerala or Trivandrum real estate to nandanamconsultants@gmail.com