Indian property bubble - AbsoluteAstronomy.com

The origins of Indian Property Market Bubble can be traced to the interest rate

Interest rate

An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

reductions made by the NDA

National Democratic Alliance (India)

The National Democratic Alliance is a centre-right coalition of political parties in India. At the time of its formation in 1998, it was led by the Bharatiya Janata Party and had thirteen constituent parties. Its convenor is Sharad Yadav, and its honorary chairman is former prime minister Atal...

coalition government in the years following 2001. Home Loan Rates fell to a (then) historical lows of 7.5% in early 2004. This prepared the basis for the increase in real estate property prices across India

India

India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

. Low interest rates triggered interest in individuals to borrow to own their own homes and this triggered an increase in demand for real estate across India.

The Indian Property Market has been growing fast since March 2005, when the current UPA

United Progressive Alliance

The United Progressive Alliance is a ruling coalition of center-left political parties heading the government of India. The coalition is led by the Indian National Congress , which is currently the single largest political party in the Lok Sabha...

government decided to open FDI

FDI

-Medical:* FDI World Dental Federation, Fédération dentaire internationale. The World Dental Federation also have an , also known as the FDI.* first dorsal interosseous, one of the four dorsal interossei muscles of the hand -Finance:* FDi magazine, a UK-based publication that covers foreign direct...

in Real Estate.

Some have suggested that given India's population density

Population density

Population density is a measurement of population per unit area or unit volume. It is frequently applied to living organisms, and particularly to humans...

is closer to that of Europe

Europe

Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

than that of America

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

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 happens 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 1200 square feet (111.5 m²) or 1400 square feet (130.1 m²) of build up area will cost about 60 Lakhs to 1 Crore or even more, same for other major Indian cities Chennai, Bengaluru, Hyderabad, Pune , Gurgaon,etc.. . Where as in US, Australia, UK or France a 3 bedroom/2.5 bath townhouse which is at least 2000 square feet (185.8 m²) around most of metros( other than Manhattan and Los Angeles ) will cost between 250,000 USD to 500,000USD which is between 1 Crore to 2 Crore Rs. This houses have parking garage, back yard and with basic Kitchen setup including cabinets, refrigirators, washer and dryer 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. Also the Interest rate paid by indians is almost double that of there developed country pears makes the EMI paid on par with developed countries in many cases.

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.

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.

Update on Indian Property Bubble 2011

Mumbai’s residential property market is predicted to witness a glut in 2012-13 owing to steady new launches at a time when sales are extremely slow, according to Indian real estate consultancy Jones Lang LaSalle India as reported on Navyroof.com..

As of April 7th 2011, Navyroof.com. featured an article Mumbai residential property set for fall of up to 35% by Jones La LaSalle which says property in Delhi and Mumbai could fall by as much as 35%. The reasons for this is Indian property developers who bought land at high prices are now having to bring prices down considerably and of recent residential sales about 65% of flats in Delhi and 35% in Mumbai have gone to speculators according to Jones Lang La Salle.

Some Delhi commentators such as Prerna Agarwal. feel the Indian property market needs to be looked at in context of the overall economic situation in India and the local real estate pricing trends prevalent in a region. The Indian economy is booming with an annual GDP growth rate of 8.5- 9% creating a class of potential investors with significant disposable income. As housing remains a concern in major metro cities, sufficient demand generators for residential units are there for the next decade and expect prices to rise 10-15% in India in next five years.

Its been reported Indian property prices could fall 10-15% by Diwali http://www.navyroof.com/blog/2011/09/indian-property-prices-could-fall-10-15-by-diwali/.

External links

Core Economics animated Real Estate Rollercoaster Ride
Real Estate Times India

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Update on Indian Property Bubble 2011

See also

External links