Cloud of Bubble-Burst Hovering Over Housing Sector
In 2007, the housing industry was on a roll. Land value appreciated almost every week. Capital value of plots would rise by Rs. 200 to Rs. 300 within a week. This was also the year when the country’s economy was strong and rupee was vibrant. People’s incomes were growing along with the real estate values. Demand for real estate was at a high while the supply was limited.
The year 2013 has seen a stark contrast where the scenario is quite opposite. While there is a good supply of property, there are few takers for them. Developers are sitting on piled up inventory and deep debts. The inventory pile up of unsold houses has reached about 670 million sq.ft. Demand has fallen and projects are stalled in big cities with private equity investors trying to exit the industry. The rupee value has fallen and there is a weak economic sentiment in the country. The real estate sector is seeing a dark cloud hovering over it in the current scenario.
The country saw reduced sales in the second quarter this year compared to the first quarter in five key cities viz. Mumbai, Delhi-National Capital Region (NCR), Hyderabad, Pune and Chennai. The second quarter saw a drop of 12% in Mumbai, 13% in NCR, 15% in Pune and 7% in Chennai in property sales.
The correction phase
The falling sales in metros and increasing inventory pile up is leading to a price correction phase according to real estate consultancy Liases Foras. According to the firm, focus has shifted towards end users than investors. The plots bought with the intent of investment by people are coming back to the market at discounted rates. For example, the prices have declined by about 20% in Gurgaon and about 15% in Faridabad in secondary markets. Mumbai and Delhi are seeing price corrections in high-end residential segment.
Mumbai is most affected
Among all the cities which have seen a bad year in the real estate sector, Mumbai is the worst hit. In Mumbai, the inventory would be sold within seven to eight months in the year 2007. However, now it is taking up to 30 months to be sold. Most developers are in deep debts and are trying hard to avoid loan defaults. Private equity investors are struggling hard to exit the sector.
With the current economic situation, it will be a while before the real estate sector sees the light of the day.
