Indian Real Estate Bubble 2014- will it burst?

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Since 2008, people have been concerned about the escalating property values. This year, the fear has grown into belief and expectation that seem to be dependent on powers of speculation. Last year, one of our writers had expressed his views on “India Real Estate bubble 2013”. 

 

However, with the interest in real estate decreasing rapidly in contrast with the real estate prices that have held steady throughout India, real estate prices seem to be heading for a bigger fall. Here are a few indicators of the existence of real estate bubble in India and its possible end. 

 

Google search results show that there has been a decrease in the search for real estate projects in New Delhi and an increase in Thiruvananthpuram. We had dealt with a similar indicator in the month of September 2013. Within 2 months Delhi, which was listed comparatively higher for the month of September, seems to have drifted down in terms of internet research for real estate. This might be an indicator of waning interest, among people, in properties in Delhi which are said to be very costly due to overstated prices by builders. On the other hand, this could be also be indicative of people's optimism about reduction of real estate prices in Delhi which could have dissuaded some buyers from investing in real estate. Such possible customers could be end users waiting for the price to fall further.

trend real estate 04

 

Leading banks such as SBI have been facing problems recovering bad loans and have seen an increase in non-performing assets. For the period June-September 2013, the Gross Non performing Interest increased from Rs. 60,891 Crores to Rs. 64,206 Crores QoQ while the net Non-performing assets increased from Rs. 29,990 Crores to Rs. 32,151 Crores QoQ. These increases came after similar increases in the April-June Quarter. These increases also suggest that the possible reasons for increase of non-performing assets might be lower recovery of real estate loans or poor performance of other loans like business loans, private loans, etc. If the reason is the lower recovery of real estate loans, then it might be suggestive of the negative outlook of people and their reluctance to go through with property purchase due to reasons like property devaluation. If the lower recovery is due to the poor performance of other loans, then it implies that the economy in general might be steering towards trouble, which is as expected based on current circumstances. This would, in turn, imply that people would be unwilling to invest much in real estate which would cause a negative demand shock in real estate. This is expected to lead to reduction in property price across India. Unless sellers and builders are bullish on retaining the exorbitant property prices by lowering the sales, the market is headed for correction. On the other hand, some indicators suggest that this pattern of real estate developers bullishly retaining the prices at their current value might delay the onset of devaluation, at the same time, causing a much steeper fall if the fundamental economic conditions do not improve. 

 

Economists use certain ratios to determine real estate bubbles. One of the indicators is the price to income ratio. This indicator is an affordability indicator and is the ratio of the average house price and the average disposable income in a country which might be expressed as percentage or as years of income. This ratio can tell us how long a family will have to work to be able to repay the loan for a house or afford a house. Based on this, it might take an average Indian household about more than a century to work and pay off for a luxury home in Mumbai. However, note that this financial hub has also been classified as one of the least affordable home markets in the world. Note that this explanation takes into account only luxury homes, which are not anyone’s first choice when it comes to an expensive real estate market like Mumbai. This trend has led to a general increase in real estate prices across the city which is an indicator of the inflated prices where our real estate market is currently perched.

 

The lower Gross Rental yield, which is a ratio of yearly rental income and price of the property, is very low in India. This shows that housing or rental space is not the main problem in India. However, it is the indiscriminate investment in real estate that has increased the prices of Indian properties. It has become so high in many metropolitan cities that people have taken a backseat from investing in real estate. With the prices so high, quite a few people might prefer to live in rental homes for some time. This might reduce the net demand for real estate leading to reduced prices.

These are a few indicators that suggest that the real estate bubble does exist in India. Developers were able to keep the prices stable in 2013 by offering freebies and benefits. However, the outcome of this bubble in 2014 is yet to unfold.

Please feel free to share your views in the section below. 

 


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Comments   

+3 #3 A. S. Mathew 2014-04-06 02:24
The Indian real estate price has skyrocketed beyond an rationality and sense, and its correction mode will be too unbearable and painful for the investors and the Banking Industry.
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+3 #2 Me @Pune 2014-03-15 20:50
Hi ,

Thanks for writing such a great analysis.I am an IT Professional and always been surrounded with the fear that I dont have my own house.

When , How and where would I be able to build my own.

Th fear is not only to have a house but judging the current scenario or Indian Real estate.

Today builder tries to manipulate a customer saying that if you are not going to book the flat then you can never able to buy the house.Customer on the other side with his scared mentality tries to pull all his fund and putting his life in big risk (60 % of his salary ) in HOME loan EMI buy a flat.

I am also among those but really worried about any panic situation that might occur anytime.

Regards
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+3 #1 Joseph Thengumpalli 2014-02-04 12:19
Concurring to Krishna, The real estate in India have to under go a major correction, with FED's reducing on the currency liquidity. The NRI funds/investmen t into India will slowly evaporate this will also add up in correction.The stock market will also withdraw as the developed countries will start pulling their money back into their country.
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