State of property investment in India

Know India’s real estate bubble and its formation

The real estate in India has become one of the most expensive affairs and has surpassed all the equities, currencies and bonds by a wider margin. The real estate market performance in India shows the gale of economic progress and an increase in the GDP (Gross Domestic Product). The statistics of about 6.5% show an increase in the GDP growth of India when compared to the previous years. In other words, this phenomenon is known as ‘real estate bubble’.

The real estate market is doubling up its property prices even though the country showcases India’s equity bond along with its currency market, global issues, debt crisis and poor economy. This is one of the most deleterious trends which is being followed amongst the general investing public. The major misconception by the general public is that they are sacrificing the investments from their desired assets like gold and other luxurious aspects and instead are investing on properties rigorously, as they consider property investment a wiser investment. Similarly, people who already own a home are also going in for second home and third home with the same misconception.

What is a real estate bubble?

A real estate bubble occurs when the property prices are unrealistically increasing on a faster pace. Usually, when there is an increase in the property price market, the factors can be either inflation or a rise in middle-class incomes. But in the context of the real estate bubble the prices are critical and later end up bursting and the same high priced property comes down to a normal price.

The term real estate bubble actually signifies the delicate qualities of a soap bubble. Unless the soap bubble is not pushed from an external source, it remains stable, the same follows with the real estate bubble. Unless something occurs to disrupt the quo, it remains that way. The bubble bursts when the demand for irrationally priced properties drops sufficiently.

The rise in real estate prices/ the formation of the real estate bubble

The real estate bubble is forming in cities with skyrocketing property prices which further makes it difficult for the common man to afford. Few of the major cities having a real estate bubble are Mumbai and Delhi. It is natural that the increased property prices are influenced by negative factors and the prices will tend to remain the same based on the negative factors. The main factors for the increase in the real estate prices are the lending rates and terms, price to income ratios and rental yields. The banks which are lending their capital to the real estate, are witnessing major fluctuations as well. Talking about the consumers, the interest rates for them have gone up by 300bps in the last few years and the loan to value ratios (LTV) has come down from 90% to 80% and below.

The rise in the interest rate and the decline in the LTV ratio have had a negative impact on the consumers, as the property buyers should invest an extra upfront money to seek a loan at the higher interest cost when compared to earlier years. One of the facts being, the slowing economy level not keeping up pace with the rise in property prices. The income levels are increasing at low double digit levels for property buyers and the property prices are expected to rise about 25% each year.

Talking about the labour sector, the latest employment trend witnesses a rapid decrease in the financial service sector and instead sees an increased growth in the entry levels of the IT sector. Since there is an increase in the property price, employees from the IT entry level will not be able to afford the properties and adding on to it are the various lending terms. These factors have resulted in a decline in property affordability.

Although there is an increase in the interest rates and inflation, the rental profits are considerably low of about 2-3% across metro cities. The main reason being an increased demand for properties by the investors and increased supply of rental properties. Also due to the economic slowdown, there is resistance by tenants to pay higher rents.

The Indian investors are staking on the renewal of the economy as there are markets which have been corrected due to an economic slowdown. If there is any renewal, the equity prices will witness a sharp increase. One of the major examples for the real estate bubble all over the world is China.

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