Indian property bubble

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This article is about the housing bubble in India. For the general phenomenon of housing bubbles, see real estate bubble.

The Indian property market is not homogeneous, yet it is apparent that many cities including Mumbai, Delhi, Hyderabad and Bangalore have been experiencing massive house price inflation. Growth is fuelled in part by greater availability of credit but also an increase in speculative activity.

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[edit] Debate

Like many other countries, Indian Real Estate is booming. The difference is - India was long out of bounds to institutional investors, particularly foreigners. That appears to be changing..as per Real Estate Times

Two factors lie behind the boom. First, investors are betting on the consumption-driven growth of India's economy that is spawning glitzy shopping malls, entertainment centres, multiplexes and luxury hotels. The retail trade may soon be opened to foreign investment and the likes of Wal-Mart will fuel the demand for commercial property.

The second factor is India's emergence as a hub for global outsourcing. The immediate attraction for foreigners is the easing of restrictions on direct investment in the property market in February this year. Foreign companies can set up subsidiaries or joint-ventures to develop property, provided that their money is locked in for three years and that plots are of at least a minimum size.

However, India's property market remains unorganised and underdeveloped. This creates risks for investors. In the absence of clear title to property, the risk of litigation is high. For those foreigners who invest in India via real estate investment trusts, there are no rules on the marking of their stakes to market or on whether they must pay stamp duty on transactions.

[edit] History

Primarily the employment results due to MNCs.

[edit] Reasons

The Indian real estate market has been witnessing phenomenal growth since 2002/2003. The growth was initially fuelled and subsequently sustained mainly by cheap housing loans. Years ago, when India was a closed economy with lots of government control and intervention, the interest rates for house loan used to be as high as 18% per annum. But the gradual liberalization of the Indian economy and opening up of the domestic market, unrestricted flow of FDI and full current account convertibility of Indian currency (Rupee) brought down the PLR (prime lending rate) substantially. So around 2004, the housing loan rates touched the all time low of 7.5-8%.

The other most important factor was the rapidly rising income level of the Indian middle class. With the opening up of the economy, multi national corporations came. And with them came the fat salary packets. In the new millennium came the outsourcing boom. IT and ITES (IT Enable Services) companies, mostly of Indian origin, took the wages to dizzying heights. People from all other industries started joining the outsourcing industry in hordes. Finally non-IT companies were forced to raise the salary levels considerably to attract and retain talent.

Till 2004 the growth in the Indian property market was driven mainly by two very solid macroeconomic factors – cheap credit and higher wages. Property prices increased rapidly, backed by strong demand and good cash flow. Till then it was a boom not a bubble. The phenomenon could be logically explained.

But from 2004 strange things started happening in the country’s realty market. Prices started spiraling up endlessly. Some high growth areas saw 100% increase every six months. Builders continued to get enough buyers for whatever absurd prices they quoted. Now that is a very strange thing, when seen in the Indian market perspective. India is a very price sensitive market. Whatever you sell there has to give the consumer a good value for money. So when such people make a beeline for things priced exorbitantly, there is something definitely and seriously wrong with the market. It may not be wrong to assume there is a rapidly inflating bubble in the background, waiting to burst any day.

The true origin of this bubble like situation may be traced to the stock market boom. The Indian stock market has been witnessing a nonstop bull run for an unusually long time. During last couple of years share prices have gone beyond all expectations. One can draw parallels between that and Japan’s real estate crash in 1991. Prior to the crash, both the stock market and the property market were on fire. Profits from the stock markets used to be transferred to the property market, and vice versa. The same thing is happening in India as well.

[edit] Recent developments

[edit] Current situation

As of 2006, several areas of the world are thought by some to be in a bubble state, although the subject is highly controversial; see:

[edit] External links

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