Is the bubble in housing for 'real'? - Views on News from Equitymaster

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Is the bubble in housing for 'real'?

Sep 7, 2010

Donald Trump once said "It's tangible, it's solid, and it's beautiful. It's artistic, from my standpoint, and I just love real estate". For the past few years, this has been the investment mantra for nearly every investor.

In this article, we would continue with our series on asset bubbles and try to explore if Indian real estate market is in a state of bubble or not.

Displacement
In the past few years, stock markets have remained volatile. Investors started looking for opportunities outside of the stock markets. The investment everyone turned to was property. After all, if you invest in property, you get something tangible for which the prices were only headed upwards.

Expansion of credit
Every investor started to flock towards the property market. Even youngsters with new jobs would take up loans for buying a house. Housing credit started to expand and peaked in 2007. However, with the subprime crisis in US, banks started turning cautious on whom to lend their money to. The RBI also tightened its noose. This resulted lower credit to the real estate sector in 2008.

Source: National Housing Board

Euphoria
With loans being easily available for house purchase, the demand for the same shot up. Builders started hoarding properties in anticipation of higher prices. Advertisements for new apartments started to feature across media. This led to a state of euphoria in the real estate markets. Speculative boomProperty prices that had already reached unrealistic levels toughed new heights when the demand started picking up for second and third homes. Houses were now being bought as an investment rather than for residential purposes. The prices levels in metro cities in particular became unaffordable.

Source: National Housing Board

Bursting of the bubble
However, by mid 2009, India started reeling under ridiculously high inflation rates. Bankers started waking up to the scare of unrealizable loans (NPAs). They had seen their global peers going under due to the real estate 'boom' in their countries. The credit for housing started to come down. The RBI started raising interest rates to absorb the excess liquidity in the system. As a result the demand for real estate started to come down. While select pockets did see a correction in housing prices, the metros are yet to witness any meaningful change.

Verdict:The property bubble in India has become more regional rather than universal. While prices have come down in some cities, prices in the others are still unjustifiably high. As to when this bubble will burst? Well, our guess is as good as yours.

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1 Responses to "Is the bubble in housing for 'real'?"

chanchal

Sep 29, 2010

I dont why RBI not taking action against hot money fromMauritius, Indian market is 100% investment driven and there is no real demand, if u have black money invest in Indian real estate !! is RBI sleeping?

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