The real picture of Real Estate market in India

Indian real estate prices remain far detached from reality, even as inventory is going up to as high as 80 months in some of the major markets. Sales in main cities have declined by almost 50%, as prices remain extremely high for home owners whose incomes have taken a big beating in the last few years due to high inflation and a declining job market.

Indian real estate prices have remained in the stratosphere post the Lehman crisis, as easy liquidity and corruption made real estate perform very differently from the normal economy. Black money has seeped mostly into the real estate market, due to lack of other options which has kept the apartment prices extremely high. The high inventory have been seen last year but developers have not cut prices. There is evidence of 10-20% cut in prices across different segments, but no general aversion to real estate as an asset class; which shows that real estate will have to go down a lot before it touches bottom. Real estate ads still plaster newspaper with Times of India even publishing a separate real estate section almost every week. The margins for developers and investors remain high (more than 20%), which means that developers keep building even as sales have slowed to a snail’s pace.

Also read about Real Estate Companies in India.

The detachment from reality is the fact that the average price of an apartment is almost $500,000 in Mumbai, when the per capita income is just $1500. This means that it would take more than 300 years for a normal person to buy a flat. Even considering that income levels are higher in Mumbai, it would take a person an absurd number of years to buy a flat.

Real estate prices have already started to stagnate over the last year and renters/buyers are enjoying more leverage over investors/landowners these days, who are hard pressed to find buyers/ people to rent. The overpricing in real estate is also proved from the fact that rental yields are barely 2% in a country, where capital is around 12-13% for commercial borrowers. Safe 10 year bonds also return more than 8%. Investing in real estate at this point of time seems extremely stupid, despite the economy showing signs of rejuvenation.

Also corruption and black money are seeing bad days currently, which means more pressure on the real estate market which is built on corruption and ill gotten money. I think the best case scenario is time correction for the real estate market, the normal case scenario would be a sharp price decline from the current levels.