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rising real estate prices can never be an engine of growth


rising real estate prices can never be an engine of growth

Last updated: November 30 2006
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  • rising real estate prices can never be an engine of growth

    Hi Folks, just read this article and thought of sharing it with you. A thought just crossed my mind.... is Indian real estate going to move into a phase like this.....

    DUBAI may soon be the town with the tallest building in the world, but it is also a place where hardworking people increasingly struggle to give their families a decent living. Wages have stayed essentially flat over the last three years, while rents easily doubled alongside inflation in other consumer goods which was not negligible either. This is not just a soft social topic that may concern charity organisations while high-level executives revel in their success stories on the commanding heights of the economy.

    With rising school fees, expatriates are looking at the option of sending back their families and switching to a bachelor accommodation. There are justified worries that the runaway market in real estate and rents is stifling the very economy it is depending on. Some companies have already decided to move away, as costs were spiraling out of control. This is about to affect the economic success in other sectors in a very tangible way.

    It is a simple truth that rising real estate prices can never be an engine of growth: What the seller wins, the buyer loses and the wealth in the economy stays essentially flat.

    One can argue that Dubai has a constant influx from outside investors and that the name of the game is about selling dreams and real estate to foreigners, thus bringing profits for everybody involved as long as this demand from outside does not ebb. But in the emirate, the engine of growth, in the end, is elsewhere too: in trade, in services and in selected industries.

    To be sustainable, rising real estate prices must be a symptom, not the cause of growth dynamics and a bigger number of people should be participating in the boom as stakeholders.

    This is not the case anymore in Dubai. Only a minority reaps huge profits, while the majority is left out. Middle class families have been already priced out of the market, next in line are the young single professionals who want to have a foreign location in their CV and are lured to the city because they erroneously think $2,000 is a lot of money over here. When no dirham is left for things other than rent, individual spending sinks.

    Institutions that could address such grievances and inform the tenants about their rights are so far underdeveloped. Many people do not know under which circumstances and how they can approach the often overburdened rent committee. Meanwhile, limiting rent hikes to 15 per cent is a step in the right direction, but too many landlords refuse to comply, tell the tenant to take a walk and laugh all the way to the bank. Even the 15 per cent hike means a hefty doubling within five years, and who expects wages to keep pace.

    The threat of such a scenario, where unchecked market forces not only hurt consumers but the very market they rely on, delivers just another rationale for more government intervention in order to achieve balanced and sustainable growth. Beside the cap on rent increases and better enforcement of such regulations, the recent government programmes for low income housing are a case in point.

    Thus, when it comes to rents, less price hikes and more regulation will be the key in the future.

    - Khaleej Times
  • #2


    Re : rising real estate prices can never be an engine of growth

    RBI concerned about fast moving property prices

    That's an interesting article to share Bingo.
    And also of concern for the industry. The concern is justified I believe.... as the maddening hike in property prices all over the country cannot be justified by swearing by the 'boom' factor.

    Here's a news extract which has thrown light on the issue. Hope its time we discuss this now......

    Bank warns on India property prices

    Indian property prices are rising uncomfortably fast, according to the country’s central bank chief, who has warned financial institutions against excessive lending to the real estate sector.

    Reserve Bank of India governor has said “We don’t take a view as to whether there’s a bubble, but there is slight discomfort that asset prices have been moving too fast.”

    Property brokers say that the price of prime real estate in Delhi and Mumbai has risen by 40-50 per cent in the past year.

    The RBI Governor's comments also follow news that Indian property developers intend to raise up to $4bn in domestic and international share offerings by March next year in a flurry of listings that will effectively spawn a listed property sector. The RBI was monitoring property loans bank-by-bank and branch-by-branch, and making direct contact with those deemed to be lending too aggressively.

    “On the whole, my assessment is that our warnings would have had some impact and given the exposure of the banks, I would not expect damage to our banking system in a systemic sense, assuming there is a localised bubble that bursts,” the Governor comments.

    The comments point to further monetary tightening in India, where economic growth reached 8.9 per cent in the first quarter and inflation remains above 5 per cent. The RBI has raised its key reverse repo rate by 150 basis points to 7.25 per cent since October 2004.

    The Bank raised the RBI’s growth forecast for this year to 8 per cent. India’s banks have gone on a lending spree in the past year, with overall credit growth exceeding 30 per cent for more than a year.

    Growth rates in loans to agriculture and industry of 27 per cent and 37 per cent have been eclipsed by loans to individuals.

    Retail loans have surged 47 per cent year on year, according to figures released in October, with housing loans up 54 per cent by June and loans for commercial real estate up 104 per cent.

    Analysts estimate India’s property industry will be worth $50bn in sales by 2010, from $12bn last year. Property companies are reported to have plans in the pipeline worth up to three times the value of all the projects they completed in the past five years.

    The RBI wants to see banks cut overall credit growth from about 30 per cent to 20 per cent, but it has since softened its stance. “Our current assessment is that it should be less than 30 per cent but does need to go all the way down to as low 20 per cent.

    Source: Financial times
    Last edited November 15 2006, 02:28 PM.


    • #3


      Re : rising real estate prices can never be an engine of growth

      Nice article on rising real estate prices.

      Thanks & Regards
      Last edited December 1 2006, 09:01 AM.


      Have any questions or thoughts about this?