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Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed. (August 2007)
The origins of Indian Property Market Bubble can be traced to the interest rate reductions made by the NDA coalition government in the years following 2001. Home Loan Rates fell to a (then) historical lows of 7.5% in early 2004. This prepared the basis for the massive increase in real estate property prices across India. Low interest rates triggered huge interest in individuals to borrow to own their own homes and this triggered an increase in demand for real estate across India.
The Indian Property Market has been growing fast since March 2005, when the current UPA government decided to open FDI in Real Estate. The market has been growing at a dizzying rate of 100%+,.[citation needed]
Real estate in Indian metropolises such as Delhi and Bangalore has sky rocketed to levels comparable with international cities like London.
However, speculations aside housing prices depend a lot on various factors such as the age of the property, facilities, surrounding area etc. Hence, the property bubble will burst for the places bought over priced with no stronghold value to it.
Some have suggested that given India's population density is closer to that of Europe than that of America the real value of Indian Real Estate should be close to European levels rather than American levels. When looked at in that way Indian real estate is still cheap. This argument assumes the rapid economic growth in India will have brought per capita income in India to European levels within the next 5 years in urban areas.
For example, an apartment of 1500 square foot in a Bangalore suburb will cost around USD 150,000,whereas in Europe similar size costs about USD 400,000. In a class A suburb of Chicago you can buy a large house for around same amount (400K). Per capita ratio is around 50:1 ($50,000 to $1100); this suggests the presence of a bubble.
Contra argument to this is US prices should ideally move with economy/inflation rate of 2-3% while Indian prices will gallop at the rate of 10% a year and probably more as the land distribution market is inefficient.
By its very definition a bubble is a short term phenomenon while Indian real estate market has continued on a secular upward trend, apart from periodic adjustments, in the last 10 years. Bear in mind that there are almost 400 million Indians waiting to hit the middle class group and they will exert additional pressure on the system. Affordability is the most important factor when it comes to housing prices and middle class housing is much levels of affordability in most of the major cities in India. People who compare India with developed European cities, forget the huge difference in affordability in both areas. Of course there is a huge demand for housing but they can only buy what they can afford.
One of the big problem of real-estate market is that supply lags behind demand by about 5 years (Plan-Approve-Finance-Construct time).
Lack of efficient signals to market participants means that there will be periods of mismatch between suppliers and buyers hence leading to cycles of booms and busts.
As of May 1st 2008, the Indian housing market has already started declining. Prices have started to drop drastically in some major cities.
The rents are all time low. A 60 Lakhs worth property gets a rent of 10 to 15 thousand ruppes per month.
Reason for SKY HIGH Prices
Young software engineers earning between $700 and $2,000 a month in the country's outsourcing boom could stop buying homes.
The price of a 100-square-metre Bangalore flat has jumped 60 percent in two years to $100,000. Prime residential prices in Mumbai and New Delhi have doubled in that time to about 20 per cent lower than Shanghai and 40 per cent below Singapore and Hong Kong.
Dayal said that in some cities, such as Kolkata, new housing supply outstripped demand by 5 to 10 times.
"There's nothing culturally or socially in India to force 19-year-olds to leave home and buy a property," he said. "They'll just stay with their parents."
The property boom gathered pace quickly after the government eased rules on foreign investment in the construction industry in early 2005 to help revamp the country's crumbling infrastructure and fill an estimated shortfall of 20 million homes. About 90 per cent of all property investment is in residential development.
"It's very scary, prices are sky-high," said Aditya Bhargava, an executive at fund manager Trikona Capital, which is raising a $400 million fund for Indian property.
"I don't know when the correction will happen, but there's significant overheating."
Nayan Shah, chief executive of township developer Mayfair Housing Ltd, agreed with Zell's outlook for the market, but said the US billionaire's comments would shock many in the industry.
The demographic fundamentals for India's real estate boom touted by analysts appear compelling for many investors.
For example, according to CLSA, disposable income has grown 12 percent a year for the past five years, and the number of people per household has dropped to 5.1 from 5.52 in the past decade as young professionals move away from their parents.
"I think it's an ice-breaker for our country, it's like someone saying look east when everyone's looking west," Shah said of Zell's comments.
"I've seen three recessions and booms in my life, and he's seen more," he said. "But I think it will stay stable for now, and maybe from 2008 there'll be signs of distress."
Some fund managers are laying plans for when prices fall.
"We'll step up more in 9 to 12 months time when the liquidity crunch hits the market," said Sameer Nayar, the Asia head of Credit Suisse's real estate arm.
Zell said that he had no property investments in the country.
His company, Equity Group Investments, is pouring money into mass housing in Mexico and Brazil, selling units for around $20,000. But the model is unlikely to catch on soon in India.
An office delivery boy, employed to scooter through Mumbai's dusty streets lined with crumbling tenements and shacks, would earn about $70 per month, and keep $15 aside for housing. With land prices spiralling, developers do not build for him.
"We may occupy lots of slots on the Forbes billionaire list but we also occupy lots of slots on poverty lists," Quantum Capital's Dayal said. "If someone can make housing and sell it for $2,000, it would be a great market now, and for decades."
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