John

Domestic and foreign demand for property in India has surged alongside rapid economic growth. There are now concerns that the market may be overheating.
Following a decade of stagnation in property prices, the real estate sector has been experiencing an unprecedented boom since 2004-05, with prices rising by over 50% on a compounded annual basis in some cities. Price appreciation has occurred across the board, in major cities such as Bangalore, Delhi and Mumbai (so-called "Tier I" cities); "Tier II" cities such as Chennai, Hyderabad and Pune, which have established themselves as alternative outsourcing centers and business locations; and satellite cities and towns--"Tier III" cities--that have experienced price appreciation as economic activities have diversified and infrastructure has improved.

The Indian real estate market has been particularly buoyant; this can be attributed to unprecedented rises in disposable incomes, sharp increases in global liquidity, selective capital account liberalization, looser credit policies, a greater availability of leverage due to financial liberalization and a consequent increase in mortgage lending and price increases that have themselves fueled a speculative boom.

There are concerns that the property market has risen too much and too fast in relation to economic fundamentals, which remain robust. Several structural factors should ensure that property prices continue to grow robustly, assuming that the economy maintains a trend growth rate of 7% to 9%.

These factors include rising incomes and a growing middle class, a favorable demographic structure, the nuclearization of families and subsequent drop in family size, increased urbanization (currently 30%), high population concentration (one in every six people in the world lives in India) and greater financial and capital market development, which will boost the under-developed mortgage market.

Nevertheless, there are concerns that the market may be on the verge of a sharp downturn. In the near-term, the key challenge for the Reserve Bank of India is reining in inflation and cooling the market through monetary and credit tightening without creating a hard landing that could have significant political and economic consequences. The RBI has taken steps to curb liquidity by tightening monetary policy. It has increased interest rates several times over the past few months, to 7.75%, and the resulting squeeze appears to be cooling the property market.

The RBI is also closely monitoring the exposure of banks and financial institutions to real estate, urging them to exercise due diligence in assessing credit risks, and tightening loan regulations. However, the banking sector is strong and diversified enough to withstand a property price correction, provided it is localized.

Over the longer term, improving transparency would strengthen the property sector (particularly in Tier II and III cities). The sector remains fragmented, and transactions costs are high. The regulatory framework also needs to be improved substantially to ensure that the rights of both home sellers and buyers are taken care of. Fostering financial and capital market development --including the promotion of asset securitization--will also be critical in ensuring the availability of a strong retail market for housing finance, while ensuring that banks are not overexposed.

Property prices have soared on the back of rising purchasing power, relatively easy financing and significant optimism about growth prospects. While there is a risk that the market may be overheating, the RBI has moved to minimize the impact of any correction on the financial system and the rest of the economy. Beyond the current cycle, growth in the sector is likely to remain strong on the back of rising demand for houses, malls and office space.

Manoj Misra

Hello John:

Now we see a cooling down period in the industry and correction is happening in price but your article indicate otherwise.. what's the date of this article(original)?

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Manoj Misra

Get a different view...

John

Dear Manoj
Thank you for being such a passionate member of this site. I’m sure that your motto in life is "practice what you preach". You simply inspire.

But with due respect I would like to inform that this article is published on 5th June, 2007 in the forbes.com website.

My actual purpose for posting this article is that though every one in India is crying about the correction in the property prices but the actual fact is that, may be the prices are not soaring like they were, say a few months ago, but they are not falling either. We can at most say that there is stagnation in the prices in some cities, especially in the Tier III cities like in Chandigarh, Jaipur, Ambala, etc.

The article discusses about the possibility of a certain cool down session in the real estate market in India in the near future but I am yet to come across any relevant fact that proves that the real estate prices have actually gone down.

India is an emerging Superpower and there will always be constant requirement for more and more residential and commercial spaces throughout the country. With the rise in disposable income of the average Indian and affordable credit policies, real estate prices can only be expected to rise.

So I would like to insist that

Quote:

Beyond the current cycle, growth in the sector is likely to remain strong on the back of rising demand for houses, malls and office space.

Thanks & Regards
John

Manoj Misra

Dear John:

I am sure that our active discussion at this forum will help!!!

The source of the information and date is really helpful. Thanks.

I can tell you that that at Greater Noida because of local political changes, property rates have gone up in last month!! Leaving the local aberrations aside, I am more keen to understand the current Indian trend.

I was with a leading real estate fund house (can't name it because of NDA) yesterday. In their assessment:
1. In apartments & built up commercial real estate, prices have stagnated.
2. Land prices have come down


That's was on my mind when I put my post!!! It will be great to hear from rest of the forum friends to check what is happening in their area!


Regards,