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Sunday, January 12, 2014

What is delaying inevitable, not invincible, property bubble burst in India?
New Delhi: While real estate in India is still surviving, there is another side to the story. Ghost cities in China or property bubble in India shall not last forever. Daily Bhaskar Money published a story couple of months ago explaining why real estate is not any more a lucrative investment asset in India. And we are back to explain our readers with more food on the topic.

Lately, a report by CBRE shows the slump in the prices of Indian properties in global market. While New Delhi’s Connaught Place slipped two notches to become seventh most expensive commercial destination, Mumbai’s Bandra Kurla Complex plummeted to 15th position and Nariman Point stood at 32nd step of the ladder.

Till some time back, Indian property market was overflowing and numerous projects’ construction was in progress. Everything was going on fine – builders building and consumers buying property, others investing to double their savings – until the beast of inflation was unleashed. With inflation, consumers’ purchasing power receded; however, new projects kept knocking the market.

A situation arose when there was huge unsold property in the country, i.e. inventory, but no buyers for that property. More projects were underway as well to push the stockpile further. In such a situation, basic economics suggests that property prices should crumble owing to low demand, given the direct relation between demand and price. However, this did not happen.

Despite low demand as the consumer’s capacity to invest in property was reduced, the market prices of real estate did not plummet. An interesting situation even for economists it was. However, the truth was that the prices of the real estate were artificially held up while economics’ rules suggest other way round. Interestingly, the situation persists and we are now living in that bubble.

So, who is keeping these rates high when fundamentals indicate an opposite situation? A coalition of bankers and builders are delaying the inevitable burst of the property bubble in India. The situation is quite similar to US property bubble burst. The 2008 US sub-prime mortgage crisis was a product of coalition of bankers and builders as well.

The only difference in the two situations is – in USA, consumer’s purchasing power was artificially increased with 0% interest rates offered on home loans by banks. Even the sub-prime mortgages were offered loans to buy homes, though the buyers had huge risk on them with no fixed income. Thus, when sub-prime home owners defaulted, the property prices collapsed with no buyers in the market.

In India, the demand has not reached the saturation point when everyone owns a home and only sub-prime mortgages are left to default. In India, the purchasing power of consumers is low because of the surging inflation. To avoid US sub-prime mortgage crisis situation, central bank in India has maintained high lending rates. Thus, with high inflation and lending rates, there are no property buyers.

However, the question remains, why are property rates in India are not collapsing?

Indian property builders incurred huge loans to build property projects seeing the growing demand for houses in urban cities and suburbs in past few years. Over the time, although the buildings grew in numbers; however, the number of buyers tanked. As there were no new buyers, the inventory of builders was piled up with unsold houses.

The impasse was such that the builders were now facing pressure from banks to repay the loans they incurred to build those unsold houses. However, as the houses were left unsold, the builders could not repay the loans. The only option left in such a time with builders was to cut down the property rates to entice buyers with low purchasing power. However, builders were determined to gain desired return.

To hold the real estate prices up, builders incurred new loans from the banks to repay old loans. Property prices in the market thus buoyed and the property yet unsold because buyers could not afford houses with high inflation on one hand and high lending interest rates on the other hand. The standoff thus between the buyers and the builders with a hand lend by bankers has created the property bubble.

However, the bottleneck has to be thawed. The superficial prices of property in few cities of India shall not rise forever. To clear the loans mounted the real estate agents will have to lower the prices anyhow. The situation is perpetuating since around a year now. The property crisis is inevitable, despite much delays.

Courtesy: Daily Bhaskar