Sunday, July 4, 2010

House bubble was an eventuality

It is true that the National Democratic Alliance headed by Shri Atal Bihari Vajpayee, decided to reduce the interest rates and intrdouce the sub prime interest rates for the first time in 2001. Following this, the Home loan segment loans fell to historical lows of 7.5% in 2004. This paved the way largely to the massive increase in real estate property prices across India. Low interest rates enthused the middle class espiecally who were in the mid twneties and near thrities earning five figure salries to go for their dream home, borriwing from the Bank at the prevailing low rate of interest. This automatically triggered a higher deamnd from a section of white collared who opted fornuclear families breaking away from the Joint families. This was a new development in the joint family system of India.
Vajpayee’s government which gave way for Dr Manmohan Singh’s government decided to open up Foreign Direct Investment in real Estate Sector in March 2005. Thereafter, the market has been growing to dizzy heights above 100%. Real estate in Indian metropolises such as Mumbai, Gurgaon, Chennai, Bangalore, Kochi has sky rocketed abnormally to tandem levels comparable with international cities like London.
But deceleration of prices became evident, as the Banks slowly increased their floating and fixed interest rates. In places like Chennai suburbs, an apartment of 1000 Sq foot would cost around $ 1,50,000, whereas in Europe, for a similar type apartment, yopu would have to shell out $ 4,00,000. In a suburb of New York, you can buy a large house for around the same amount ($4,00,000). Per capita ratio is so low in India compared to US which suggest the presence of bubble at both the places.
Housing prices depend upon a number of factors – age of the property, facilities, area/location, tarnsport facilities, etc. The property bubble will burst where the properties are over prized with no stronghold value to it.
It is the view of Real estate economists that India’s populatioon density is closer to that of Europe, while in America, it has very low population density compared to that of India. When we compare the real value of Indian Real estates, it should be compared with Euroepan levels rather than American levels. Indian real Estate rates are rather cheap compared to european pricing.Economists are predicting that Indian per capita income will be in close proximity to the Euroepan per capita in another lustrum as indian economy is booming and growing in size. This growth may be occuring mostly in urban areas. India’s prosperity will take some more time to reach the rural areas.
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 1-1-2008, the Indian housing market has already started declining. Prices have started to drop to some extent in few major cities. The same thing will happen in the United States, sooner or later, causing an economic upheavel. Europe will not be far behind.
[Written in 2008, much before the Anerican meltdon]

No comments:

Post a Comment