Is real estate market in India headed for a crash? The answer is an emphatic 'yes', and the reasons for this conviction are far too many. Real Estate prices worldwide generally follow a lag effect: they are the last to sell off in a declining business cycle and the last to revive in a recovery. The primary reason for this is that a large chunk of the surpluses generated in a booming stock market find their way into real estate investments, leading to an increase in speculative activity in the real estate sector. Stock market decline that started on November 5, 2010 (some may call it a bear phase) is now over 4 months old, but real estate prices are still to witness a significant correction. The real estate prices in India (especially in the residential sector) have bounced back after the 2008 global meltdown, and are currently ruling at around 20-30% higher than the peaks attained during the 2007 boom. But a severe correction is not far away.
According to the analysis done by property consultants including Knight Frank: dipping sales, inventory pile up, rising debt and jittery investors (in the aftermath of various scams) is a sure shot recipe for an impending crash. The tough stance taken by RBI on roll over of loans to the real estate sector points to the fact that RBI is not comfortable with the exposure of banks to the sector. The developers have themselves to blame for the supply demand distortions in the residential real estate sector. The herd psychology of developers for constructing luxury projects have pushed the residential market towards a state of free fall. Sales in this segment have fallen as much as 70% over the past few months. Most developers have been offering discounts, concessions, freebies to sustain themselves, but there are few takers yet. It is often said that when the roadside hawker starts investing in stock market make no mistake about the market crash, similarly when you find increasing number of SMS in your mobile from real estate agents make no mistake about the impending real estate market crash. Just count the number of messages received by you recently and you would know the answer.
Having convinced about the impending crash in the real estate sector (residential market) what should an investor do at the current juncture:
- Postpone your decision to buy a second house for investment purpose or speculation (no problem if you are buying a first house), you may get a better price six months down the line.
- Do a due diligence on the builder before locking your money into an under construction property. Paucity of finance could delay the projects indefinitely.
- Stay away from real estate stocks (especially those into luxury projects), these beaten down stocks still have a long way to go on the downside.
- Be wary of financial sector stocks: They still are over owned by the market players, but a real estate crash could dent their margins considerably.
1 comment:
Now the government, real estate sector players and the banks are together controlling the market and its prices in India. Thats why prices are not crashed in India. Hope it may happen after one to two years time. Remember the propety crash in Japan in 1980's.
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