The
Indian property market has been booming since March 2005,
when the UPA government decided to liberalize
foreign direct investment norms in real estate and introduced the
SEZ Act 2005, and allowed private equity funds into real estate. While the sub prime crises engulfed the US in 2007, leading to a crash in US property prices and a contagion affect in Europe, Indian property prices stood firm.
Real estate in India has bucked the trend of non-performing asset classes. Property prices have outperformed
equities, currency and bonds by a wide margin in the past 5 years. India
ranked second out of 50 countries in annual growth of residential prices, in
Knight Frank’s latest global housing price index, the average property prices rising by over 22%. The average price of the Indian real estate pie has almost trebled in the past decade. A
valid question being asked by almost everyone looking for property in
Mumbai, Delhi or any of the other city where real estate prices have spun out
of control, is about real estate bubbles in the Indian
property market. A
real estate bubble happens when the cost of homes climbs unrealistically fast, overlooking the affordability factor.
Is the euphoria in real estate prices sustainable in the long term? The most convenient argument in favour of high real estate prices is that land being a scarce resource its demand will always outstrip supply. But some important facts discussed below deserve some merit:
- Huge inflow of black money in the Indian real estate sector has avoided a sub prime like crisis, as most lenders finance only the book value of the property which does not take into account the black money. This acts as a buffer for the lender in case of default, and also acts as a deterrent against wilful default as the borrower's actual stake in the property is fairly high.
- In a slowing economy income levels have not kept pace with the rise in property prices leading to a reduction in end user demand. The increasing presence of speculators is keeping the prices artificially high. About 65% of flats in Delhi and 35% in Mumbai are in possession of speculators according to Jones Lang La Salle.
- Rental yields at 2-3 percent compare unfavourably with fixed deposit rates of 8-9 percent. With inflation at a high 7-8%, holding on to property will become increasingly difficult given the high interest rates.
- Unsold inventories in major metros like Mumbai and Delhi NCR are giving ample signals for an impending crash like situation. A report by real estate consultant Knight Frank has revealed that Mumbai has more than 80,000 flats lying unsold. This is in addition to another 50 to 100 thousand flats which are vacant, but not available for sale. Another study reveals that over 61% of the allotted flats in Gurgaon are lying vacant.
- Builder cartels are playing games to keep the prices artificially high. A few units are released under a pre-launch plan and new escalated prices are announced at the time of official release to create liquidity for initial investors. Recent liquidity released by Central banks has been responsible for success of the builder-speculator game plan.
In the days to come the liquidity position will become tight as European crisis comes back to occupy the centre stage again. At that stage the supply and demand mismatch shall force distress sales from builders straddled with unsold inventory. As the spiral of downward trend in property prices extends, distress sales from speculators will increase the supply leading to a further fall in prices. In the given situation, property prices are vulnerable to a crash in the prime markets of Mumbai and Delhi-NCR. There is a possibility of property prices correcting up to 15-20% in these markets. Tier 2 & 3 cities may avoid a major downfall as there is still genuine buying demand in these cities.
