Indian Real Estate Bubble – Causes
Indian Real Estate price have been in a bubble over the last 5-6 years and I have repeatedly written about the massive bubble in the real estate area, which was distorting the economy and creating issues. The main causes of the Indian real estate bubble were:
- Massive amounts of black money (illicit money) which was being funneled into real estate as this was the only asset which could absorb the hundreds of billions of dollars. You can only keep that much cash at home and buy so much gold.
- Low interest rates in developed economies until recently in India. The real interest rates in India were negative which made both gold and real estate attractive assets in a high inflation environment.
- Government tax incentives for buying homes (Rs 2 lakhs tax exemption on housing loan interest).
- Lack of attractive alternatives
- Diversion of corporate debt into real estate. A large number of scams (NSEL scam) money, Sahara money was diverted not only into real estate in India but also outside India (Sahara buying the iconic New York hotels – Plaza and Grosevnor House); Saradha scam
Indian Real Estate Bubble burst
The bubble fueled by ever increasing prices kept on bubbling higher and higher, till the transaction volumes evaporated last year. This was mainly as the prices had become highly unaffordable to end users and investor “fools” getting exhausted. The reasons for the real estate bubble burst are:
- The new government is trying to crack down on black money by bringing in new laws. Corruption has also reduced which has reduced the supply of black money.
- Real Interest rates in India have become positive after a long time. Inflation has moderated significantly with wholesale inflation negative and consumer inflation reaching low single digits.
- This issue still remains and one that is unlikely to be get solved
- The stock market has become an attractive asset class giving good returns after years of stagnation. Massive amounts of domestic money are flowing into the domestic market in combination with foreign capital. Both equity and debt look attractive compared to real estate these days.
- Most Indian banks are drowning under bad debt and non-performing assets given to major infrastructure companies. They have drastically reduced lending to the real estate sector, which means that developers can no longer roll over debt and have to sell properties in order to remain alive. Some very large developers such as Unitech and JP Associates are already on the verge of bankruptcy.
Indian real estate prices had become absurd and still are absurd, despite a 10-30% fall in prices over the last one year. Indian rental yields are abysmally low at 2-3%, compared to government 10 year bond yields at almost 8%. This means that without capital appreciation, real estate in India is a massively losing proposition even if the prices stagnate if not decline. Already there are a huge number of stories where people are losing huge amounts of money due to decline in the prices of real estate.
Indian real estate is peculiar since a large number of people invest in under construction properties. With many developers in losses and huge debt, many of them are not getting completed resulting in huge holding cost for investors. Already newspapers are advertising distress deal in real estate. Even the die-hard real estate bulls have disappeared, as the evidence is quite stark. It has become a buyer’s market with sellers quite desperate. I think that this trend will continue till the real estate prices reach some sort of valuation sanity. A recent report said that India real estate prices will still be overvalued, even if they fall by 50% based on the rental yields.
Indian properties remain vastly overpriced compared to the amenities, location and the income levels of the country. Here is an example of how a one day rain led to a massive deluge in India’s millennium city Gurgaon, where apartment prices range from $1-2 million in the prime golf course road (DLF Corporate Towers).
The NCR residential market is stuck with an estimated inventory of 1,70,000 units whileT another 90,000 dwelling units under-construction are likely to be delayed for hand-over, reveals the ASSOCHAM recent survey. “A large inventory is piling up despite prices correcting by over 20 per cent in the last one year, while there is a huge fall in the new projects being launched by developers who are hard-pressed for cash,” the paper noted with concern. The increase in inventory level is because of the falling demand from actual users as also the investors. Even the ready-to-move flats are finding few buyers, reveals the majority of the respondents. The ASSOCHAM conducted a random survey of nearly 120 real estate developers in Delhi-NCR. The survey reveals that demand for buying property have decreased by over 30-35% over the last year. The ticket price 3-bedroom, 2 BHK and single room flats has seen correction by 30 per cent in Noida, 25 per cent in Gurgaon and 15 per cent in some key areas of Delhi but still, the demand stays subdued, adds the survey. “The sentiment in the housing market is really at a low key. Even though there are signs of macroeconomic improvement, it would be a quite a lag before it gets reflected on the real estate markets”, said Mr D S Rawat ASSOCHAM Secretary General while releasing the survey.