Indian property bubble
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The origins of Indian Property Market Bubble can be traced to the interest rate reductions made by the NDA 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 massive increase in real estate property prices across India. Low interest rates triggered huge 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 government decided to open FDI in Real Estate. The market has been growing at a dizzying rate of 100%+,.[citation needed]
Real estate in Indian metropolises such as Delhi and Bangalore has sky rocketed to levels comparable with international cities like London.
However, speculations aside housing prices depend a lot on various factors such as the age of the property, facilities, surrounding area etc. Hence, the property bubble will burst for the places bought over priced with no stronghold value to it.
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 European levels within the next 5 years in urban areas.
For example, an apartment of 1500 square foot in a Bangalore suburb will cost around USD 150,000,whereas in Europe similar size costs about USD 400,000. In a class A suburb of Chicago you can buy a large house for around same amount (400K). Per capita ratio is around 50:1 ($50,000 to $1100); this suggests the presence of a bubble.
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.
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.
