Friday, April 6, 2012



Continued from Part 1…


If you want to, do read Part 1, but remember to come back here and read Part 2, or you can always read Part 1 after you have read Part 2 - so read on ...


Before I delve into mystery of INVENTORY OVERHANG let me tell you a Mulla Nasrudin story called THE CAT AND THE KABABS

One day the gourmet Mulla Nasrudin bought five kilos of the tastiest kababs  from the best restaurant in town to enjoy with his friends in the evening party he had organized for his closest friends.

He gave them to his wife with explicit instructions in how to serve them in the evening party and went out for a walk.

Mulla Nasrudin’s wife garnished the kababs and kept them in serving plates on the dining table.

Suddenly, her sister and her kids arrived unexpectedly.

Mulla Nasrudin’s wife’s noticed that her sister and her kids were staring at the mouth-watering kababs in hungry anticipation, so the wife asked her sister and her kids if they would like to taste a kabab.

“Yes,” they all said and so the wife, her sister and her kids tasted a kabab each.

The melt-in-the-mouth kababs were so delicious and tasty that they could not resist the temptation to eat a few more.

They loved the kababs so much that, while gossiping, they unconsciously kept popping the kababs into their mouths, till suddenly all the kababs were finished.

Then the wife’s sister and her kids said goodbye and left.

Mulla Nasrudin’s wife realized that the kababs were finished.

To salvage the situation Mulla Nasrudin’s wife quickly prepared pakoras to be served in lie of the kababs.

When Mulla Nasrudin’s friends arrived they were served pakoras instead of kababs.

After his friends had left, a furious Nasrudin demanded an explanation from his wife about why kababs were not served.

His wife meekly said that the pet cat ate up all the kababs.

“There were 5 kilos of kababs.  Don’t tell me the cat ate up the full 5 kilos of kababs,” Nasrudin shouted.

“Yes. Your cat ate all the kababs - the full 5 kilos. Why don’t you ask your darling cat instead of scolding me?” his wife said.

Mulla Nasrudin caught hold of his cat and put the cat on the weighing scale.

The cat weighed exactly 5 kilos.

Nasrudin looked at his wife and said, “The cat weighs 5 kilos and the kababs were 5 kilos.”

Nasrudin’s wife said, “So?”

Now, tell me my dear wife,” Nasrudin asked, pointing to the cat sitting on the weighing scale:

“If this is the cat then where are the kababs?
On the contrary if these are the kababs then where is the cat?”


Please keep this story in the back of your mind while we discuss the impact of inventory overhang on real estate prices, especially in Wakad Pune.

In real estate the only factor which determines property prices is the DEMAND versus SUPPLY Equation. 

Thus, if you want to estimate whether the real estate rates are going to rise or fall you must have some idea of the Demand – Supply situation in the location where you want to invest in property. 

But how do you do it? 

Well, one quantitative measure of the Demand versus Supply Equation is a term called INVENTORY OVERHANG.

Inventory Overhang is the number of months it will take for all the unsold supply of units in the market to be sold out at the current sales velocity (rate at which housing units are being sold). 

To give you an example, say in the location of Wakad, there are 1000 apartments available for booking in launched, ongoing and completed housing projects and say about 50 apartments are beings sold per month (sales velocity=50) then the inventory overhang will be 1000/50 = 20 months. Thus, we can reasonably forecast that it will take 20 months for the unsold supply of units in Wakad to be sold out at the current rate at which units are being sold (sales velocity).

However, it is not so simple, since both the supply and demand are variables and the number of unsold units will keep fluctuating depending on increase in supply as new projects are launched and also increase or decrease in sales velocity.

Price Appreciation is inversely proportional to Inventory Overhang.

The lower the inventory overhang the faster and higher the prices of property are going to rise and the higher the inventory overhang the slower the property rates are going to rise.

In fact, if the inventory overhang exceeds the “safe” limit (20 months or so) then property rates are likely to fall.

So if you are an investor you better estimate the inventory overhang before you invest in property at a certain location.

But does all this theory work in actual practice?

Let’s take a hypothetical example of Wakad in Pune where I live.

Now Wakad is a huge spread out place. In Wakad, the general infrastructure is very poor and the Social Infrastructure is almost non-existent. The current property rate in Wakad is certainly not commensurate with the infrastructure and amenities.

If you walk around the fast emerging concrete jungle proliferating all over the place, you will realise that there is probably a huge oversupply of residential apartments, due to a large number of ongoing realty projects, and, if you ask around, it seems that hardly anyone seems to be buying flats.

This means that in Wakad Pune the inventory overhang is quite large.

Is the inventory overhang 20 months, 24 months or even more? I will not risk even a rough guesstimate since, as a layman, I do not have any authentic data. That is the real problem for a layman – it is difficult to get credible data regarding supply and demand (in view of the opaque nature of the realty sector). Whereas the likely availability of units may be relatively easy to compute based on the data given by developers in their brochures and advertisements, it may not be possible to accurately compute the sales velocity since developers may like to be discreet about actual sales.

Of course, if you are really interested, one way to get reliable data is to go to the municipal authorities and find out (by RTI or otherwise) the number of property sales registered and the dates from which property tax is being levied. But doing all this may be quite difficult for the layman. So the inventory overhang you compute is at best a guesstimate.

Now, as I said, by sheer observation it appears that the inventory overhang in Wakad is quite large. Also, as supply keeps on increasing due to new launches of residential projects, which happens almost every day, the inventory overhang will grow even larger and larger by the day.

This means that hypothetically, at least in Wakad, the property prices are certainly not going to appreciate very much. Theoretically speaking, property rates in Wakad may even decline in the near future like they did a few years ago, in 2009 I think.

The inventory overhang keeps rising, the number of unsold flats keeps increasing, but despite this, the property prices, actually keep rising, instead of falling. It seems that the inventory overhang theory is turned topsy-turvy.

Intriguing, isn’t it? How can this happen? Are there any hidden factors? Or is it all hype? Or is it a case of artificial demand being created? Will this realty “bubble” ever burst?


Why doesn’t the theory of Inventory Overhang work in practice?

Is this strange phenomenon of high prices despite oversupply happening only in Pune or is it a common occurrence everywhere?

You tell me.

Can you solve this mystery?

Well, you figure it out.

Maybe the answer to this paradox lies in the Mulla Nasrudin Story I told you earlier The Cat and The Kababs

Till next time, Happy House Hunting


Copyright © Vikram Karve 2012
Vikram Karve has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as the author of this work.
© vikram karve., all rights reserved.

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A creative person with a zest for life, Vikram Karve is a retired Naval Officer turned full time writer. Educated at IIT Delhi, ITBHU Varanasi, The Lawrence School Lovedale and Bishops School Pune, Vikram has published two books: COCKTAIL a collection of fiction short stories about relationships (2011) and APPETITE FOR A STROLL a book of Foodie Adventures (2008) and is currently working on his novel and a book of vignettes and short fiction. An avid blogger, he has written a number of fiction short stories, creative non-fiction articles on a variety of topics including food, travel, philosophy, academics, technology, management, health, pet parenting, teaching stories and self help in magazines and published a large number of professional research papers in journals and edited in-house journals for many years, before the advent of blogging. Vikram has taught at a University as a Professor for almost 14 years and now teaches as a visiting faculty and devotes most of his time to creative writing. Vikram lives in Pune India with his family and muse - his pet dog Sherry with whom he takes long walks thinking creative thoughts.

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Deepak S Avasare said...

I think most market work on "second last fool theory". You just need to be second last fool to buy and as long as you can sell to someone else you are the winner.

Last year I had gone to Sawantwadi and was walking past a place where they were developing the plots. The relative accompanying me asked the person there about the plot sizes / prices etc. "The plot sizes were 3000 to 5000 ft 2 and the rate was 1.7" I was having trouble (similar to when bhajiwali says 2 Rs and I have a problem to know if it is per kg as it used to be long time ago or per 400gm or 100 gm as the case may be now). I guesses that 1.7 must be Lakhs of Rs. But per what? I asked 1.7 for 3000 or 5000 and he said per 1000.

I was stunned. This is some 2 km from Malgaon Rly Station where there was no infrastructure / development what so ever.

It seems to me that all over India there is a house (and more so land) price bubble.


Vikram Waman Karve said...

@ Deepak - I like your second last fool theory - one has to be careful not to be the last fool holding the baby!

ajit said...

Interesting post. I wonder if the same holds true for rentals, too. I'm new to Pune and have been hunting for a 2BHK apartment for sometime now. What I can't fathom is why mediocre flats with lack of even a proper approach road leave alone infrastructure command rentals above Rs 12k/month aside from a hefty deposit! I'm told that till about an year ago, it was easy to find a 2BHK flat in Baner for Rs 10k. Even owners of small apartments without proper security, water and electricity backup are demanding insanely high rentals at par with "well-developed" residences. With new projects mushrooming by the month, is there any hope of rentals easing?

Vikram Waman Karve said...

@ Ajit - You are quite right - no one can fathom the reason for such high rentals despite very poor social infrastructure. I think maybe it is due to hype created by the IT guys of Hinjewadi who are desperate for a house nearby and get taken for a ride.

Vikram Waman Karve said...

@ Ajit - As I wrote in the blog post, theoretically prices and rentals should ease - but practically - who knows?

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Unknown said...

Real Estate trade of Pune started witnessing waves of growth round the late 90's when the IT and connected corporations started putting in place base within the town.Property in Pune

pune real estate said...

The real estate market in Pune is just rising by leaps and bounds!

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Anonymous said...

Ach Tung

You asked:
"Why doesn’t the theory of Inventory Overhang work in practice?
etc., etc. ...You tell me.

Can you solve this mystery?"

The answer is very is not Black is Black Money.

Why the theory of Inventory Overhang doesn't work is because of Black Money...something that is beyond simple Supply and Demand economics.

What percentage of real estate deals (sales/purchases) in India involve Black Money? And to what extent (i.e., % of "cash component")in typical "deal"?? Now you go figure that out, and everything will be very clear.

Unknown said...

About 15 years back I used to come to Pune once a week for some official work, and remember the areas of Wakad, Balewadi, Bawdhan used to be lush green, especially during the rains.

Then slowly the hoardings started to appear....with cheap, thoughtless and crap copy... many showing a couple leaping with joy for their "dream" home .... "Greenery all around", "2 BHK in the middle of nature", "4 sides open", "six degrees of freedom" and so on. The hoardings started to grow both in numbers and size; till as you can see today, what too many "Greenery all around" projects have done to this fact "No more greenery left to be converted to concrete!"
They have done it all. Pune too has paid it's Price of Progress.

Unknown said...

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Unknown said...

This will be very useful to us....i like your blog very should need to update daily...
we have interested in real estate investing...
dave lindahl

Anonymous said...

I loved your blog and the theories.
I was hunting for a 2BHK in 2005 and did not have money then. I thought maybe by next year i will be able to buy but till this date I am still hunting. And especially now, I am totally scared. Who knows when the market will make a u-turn and I will loose everything i put in it.

We have to stand up to this menace and not invest or buy real estate property escpecially if it involves any component of black money. Unless we curb the demand, the prices will not come down. I know very well, this is not possible because we all have our basic need for a shelter and there we loose it........

Natalia said...

Thank for sharing this....yes we do believe that property are tend to rise and all the middle men gets the benefit and eventually the end buyers suffers to pay heavy on projects.

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Vikram Waman Karve said...

Thanks Dear Friends for your enlightened views and comments on this blog post and also on the Real Estate Scene in Pune

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Its may be informative post.useful to us.nice thoughts for your great work.
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Avid said...

Nice observations on property movements mostly in Wakad as i see from your posts. I am 3 years old in Pune and have finally decided to buy a house in Pune. During the search....i have realised that Pune has grown far and wide but most of new home buyers are speculative in nature and the first thught is to "make a profit" on home buying and not living in it for too if the basic thought process is temporal and a huge load of migrant DINK IT nerd population....real estate prices are only going south.....also having malls and multiplex is not the social kinda life which i would like my kids to grow up in..
.but given the current social environment....thats a pipe dream....however...currently...the markets are tight and genuine home buyers can negotiate hard as i am.....

Vikram Waman Karve said...

@ Avid - All the Best in finding a nice new home. You are right that it is end-users with a long term perspective that will stabilize the property market to realistic levels. Also with the increasing traffic problems and lack of good public transport in Pune which makes it
painful to commute long distances you have to buy a house near your workplace and that is why places like Wakad score over other localities due to Wakad's proximity to Hinjewadi where all the future jobs are going to be.

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