Indian Property Bubble

Indian Property Bubble

Economists have expressed opinion that the property market in Indian cities is in bubble-state and is expected to burst by November 2014. The primary causes triggering the bubble-burst would include political uncertainties in the country and the new Reserve Bank of India norms that severily restrict Banking exposure to the over-heated real estate sector. Prices in the Delhi-NCR region will crash by over 40% during first week of November, leading speculators throughout the country to panic and off-load/sell their investments at huge discounts to avoid the type of losses that severily burnt speculators in the United States during 2008-09.

End-users of residential real-estate in Indian metros (Delhi-NCR, Mumbai,Chennai, Bangaluru, Hyderabad etc.,) should postpone further purchase of property till the above burst cycle is over. Speculators who want to enter the market now, should prudently allocate over 150% risk premium to their asset portfolio. Sceptics need to look no further than 2008-09 to see how overleverage to speculative real estate caused disasters in the developed markets.

The Indian Property Market is purported to be in bubble territory since March 2005, when the current UPA government decided to liberalize foreign direct investment norms in real estate on Feb 26, 2005, introduced the SEZ Act in 2005, and allowed private equity funds into real estate. Other key factors that contributed to this tremendous growth were ‘lower price’ which attracted buyers and investors not only from India but NRIs & Foreign funds also deployed money into Indian real estate market. These new rules ensured that Indian money stacked in Switzerland and other tax havens can be brought back to invest in high yielding Indian property market, away from low-yielding dollar assets. Other evidence that the Indian Property Market may be in a bubble is the Adarsh Scam, where politicians and property developers were in collusion to hoard property to ensure that the property would be sold to users at high rates.

Some have suggested that given India's population density is closer to that of Europe than that of America the real value of Indian Real Estate should be close to European levels rather than American levels. When looked at in that way Indian real estate is still cheap. This argument assumes the rapid economic growth in India will have brought per capita income in India to Western European levels within the next 10 years in urban areas.

Contra argument to this is US prices should ideally move with economy/inflation rate of 2–3% while Indian prices will gallop at the rate of 10% a year and probably more as the land distribution market is inefficient. This price increase is mostly due to two reason – one primarily in most cases the developers create false claims of overbooking and increase the demand and price and the other reason most of time properties are bought sold within 6–12 months from one buyer to other. There is no system available to the public to track these sells or buys. In US there are lot of real estate website provide the details buy and sell details, what is fair value, when the house was built, how many houses are on sale,etc...

The other factor to consider is cost-to-facility ratio, in Mumbai a 2 bedroom apartment with living space of 1,200 square feet (110 m2) or 1,400 square feet (130 m2) of build up area will cost about 60 Lakhs to 1.5 Crore or even more, same for other major Indian cities Chennai, Bengaluru, Hyderabad, Pune, Gurgaon,etc. Where as in UK, US, Australia or France a 3 bedroom/2.5 bath townhouse which is at least 2,000 square feet (190 m2) around most of metros( other than London, Birmingham, Manhattan and Los Angeles etc. ) will cost between 250,000 USD to 600,000 USD which is between 1.3 Crore to 3.2 Crore Rs. These houses have parking garage, back yard and for higher range may include a private swim pool, basement, front yard. In these western countries average salaries are almost 8 times the Indian salaries but cost of house(For a much better house) is only double to triple. Also, compare what you get for your money in Europe or United states with the situation in Indian cities as evidenced by perusing the real estate advertisements. Phrases like "ample water supply" " well ventilated" " with backup generators for power supply" are littered in almost all of these ads. Bottom line is you get basic amenities that are taken for granted in the west for a premium price. Also the Interest rate paid by Indians is almost double that of the developed country peers makes the EMI paid on par with developed countries in many cases. This can be attributed to the high inflation rate in India and the high Reserve Bank of India base interest rate as opposed to as low as 0.5% interest rate of the Bank of England which makes mortgages possible at annual percentage interest rates of 4% even.

By its very definition a bubble is a short term phenomenon while Indian real estate market has continued on a secular upward trend, apart from periodic adjustments, in the last 10 years. Bear in mind that there are almost 400 million Indians waiting to hit the middle class group and they will exert additional pressure on the system. Affordability is the most important factor when it comes to housing prices and middle class housing is much levels of affordability in most of the major cities in India. People who compare India with developed European cities, forget the huge difference in affordability in both areas. Of course there is a huge demand for housing but they can only buy what they can afford(from common sense).

One of the big problem of real-estate market is that supply lags behind demand by about 5 years (Plan-Approve-Finance-Construct time).

Lack of efficient signals to market participants means that there will be periods of mismatch between suppliers and buyers hence leading to cycles of booms and busts.