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April 10, 2011Real Estate Prices in India have gone through the roof crossing the highs they made during the 2008 run-up.Note real estate in a lot of places globally are in a bubble right now – China,Australia,Canada .However the India Real Estate Bubble is seldom talked about as it has not reached the levels reached for example in China.However the property prices are becoming increasingly irrational.The causes of the Real Estate Prices increases in India are mostly due to the fact that Market Forces are not allowed to operate freely.The regulations,corruption,lack of transperncy,vested interests,cultural factors all have a role to play.Here are some of the reason that I think Real Estate Prices are totally irrational in India.Readers of this Blog are urged to add their views as this is a complex discussion and many people will say that Real Estate in India in not a Bubble but a result of High Population Density,Demand,India’s Economic Growth .
1) Corruption,Opaque Regulations,Use of Black Money – Real Estate in India is a Cesspool of Corruption and even India’s Prime Minister has also accepted it saying that high Stamp Duty on Real Estate Buys result in the preponderance of Black Money in Real Estate Deals.Due to the massive price appreciation and huge valuations,Land Scams have become quite common with Chief Ministers,Generals,Top Bureaucrats all involved in the murky environment of Real Estate in India.The most recent scam related to bribing of top public banks officials in the LIC Housing Finance Scandal has again put question mark on the fundamentals of the industry.Valuing the industry and making a real estate investment remains one of the most difficult investing tasks in the Indian Stock Market.Even Fund Managers are staying away from the Sector due to lack of trust in the Financial Statement given by the industry.
2) Global Real Estate Bubbles – One of the reasons for the sharp price rise in Real Estate in India is that Real Estate in many parts of the world are a bubble.Allowing Foreign Money into Real Estate in India has made these PE investors pay the same valuation for properties in India as outside.Note many of these “Real Estate” Private Equity Investors have yet to recover from the fall in property prices in the 2008 crash though many have been saved by the Bernake reinflation.
3) Tax Laws and Policy Stupidity – India’s Tax Laws impose high capital gains on land that is sold and not reinvested back into real estate again.That keeps the huge sums from gains in the real estate to be funneled back again.Otherwise a lot of the money would have gone elsewhere bringing the Real Estate back to earth again.India also allows an exemption of Rs 1.5 laks ceiling on interest payments on Real Estate Payment giving an impetus to investing in RE.Note such misguided laws were a leading cause of trouble for the Real Estate in USA.
4) Local,State Laws on Real Estate prevent Market Forces of Demand/Supply to Operate – India’s Local and State Laws dealing with Real Estate are as bad if not worse than Laws at the central Level.These Laws in most cases prevent the normal working of the Market Forces of Supply and Demand.The biggest proof of this in the fact that the Rental Yields on properties on India are way lower than if you took out money from selling the real estate investment and putting in a safe goverment bond.People in Mumbai the biggest real estate bubble market in India have stopped buying houses and going for rental leases.
5) Peer Pressure,Cultural Factors – A lot of people buy real estate seeing other people buying at inflated prices.Not exactly a classical economic argument given that it assume people are rational and make decisions based on value.It has become acceptable to pay a huge amount of income as EMIs seeing other people do the same.Does not matter the benefits are hardly worth the costs.Cultural factors like buying real estate preference also have played a big role.In India people avoid stocks,bond but prefer real estate and bank fixed deposits.
Summary
I can think of many more reasons but the above are the main reasons that I can think of.Real Estate in India is a massively corrupt industry with opaque laws,regulations,no clear title deeds etc.It provides a fertile ground for corrupt politicians who use their discretionary powers to favor real estate developers and enact anti-people laws.This coupled with the growing demand for houses from steadily rising middle class has made the situation a bubble.
Mall meter: More vacant tags than brands
Unsold, vacant, no takers…these words aptly sum up the story for real estate developers into malls in India. Even though retailers are spreading their wings once again after the slowdown, the absorption of malls remains sluggish, leading to high vacancies.So it’s not surprising when a consultant points out that brands prefer high streets than malls in metros, where fixed rentals have gone through the roof and are not in tandem with the sales, which is perhaps the sum of the story for retailers.
6 Comments
It’s very interesting article. Real estate bubbles are invariably followed by severe price decreases. Landbank and technology with innovations in the realty sector are likely to avoid a bubble burst and sustain the current scenario.
your blog provided nice information own visitors.your blog given an information.Real Estate Prices in India have gone through the roof crossing the highs they made during the 2008 run-up.Note real estate in a lot of places globally are in a bubble right now – China,Australia,Canada . Thanks for your posting nice blog.keep up.
There is a good book by John Kenneth Galbraith on many such incidents of financial euphoria. There was a time when Tulip flower bulbs sold for several thousand dollars in today’s equivalent amount. Everyone bought because everyone else was buying. Nobody stopped and asked if a tulip bulb was worth anything. In India we are in a similar scenario. Nobody asks if a house in a particular area is really worth that much. If they dont buy, they will be left behind. But if history is any guide, markets do correct. The cycle reverses and the all speculators run for exit, bringing the prices crashing. What is more dagerous is that such price declines may bring the consumer spending down and cause a severe slump in India.
I agree with you 100%. There should be more debates on national media in this regard. An ordinary person in India cannot afford a house any longer. I think it is a shame that rich NRI’s are buying property at stupendous rates and more rich & corrupt builders/developers are buying land in bulk cheaply and then charging through the nose to the end consumer! It’s absurd!
I liked the post above it is a bitter truth that india has emerged a big real estate hub but at the same time indian real estate market always fluctuating here and there..no one can say what will be future rate of today’s property. but seeing its scope still more and more people are getting in this sector
Real estate market is very good in Hyderabad. Prices are down by 30%- 40% .it is the right time to buy a flat in hyderabad.