Housing bubble in Indian metros?

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India needs new cities. This is the key thought that Deepak Parekh has put in his letter to the shareholders of HDFC. The latest annual report of India's largest housing finance company is proof of the veteran's concerns over Indian metros becoming unaffordable. But now there is more evidence to support that. Statistics that come straight from the banking regulator's desk.

The RBI sends out its key observations on the macro economy before its Monetary Policy review. This observation ranges from topics like inflation to capital markets to GDP growth. This quarter's issue has an interesting note on the central bank' view on housing in metros. It was accompanied by statistics on how the 4 metros in India have witnessed an inexplicable rise in housing prices since the last 4 quarters. Taking 4QFY09 as the base the RBI has shown the rise in housing prices in each of these cities. And Delhi tops the 'house inflation index' (if you will). The union territory has seen 27% rise in housing prices over the past 4 quarters! The fact that it is the host to the upcoming Commonwealth Games seems to be the obvious explanation. But not enough to justify the disproportionate price rise. The price rise in low teens in Mumbai and Ahmadabad are certainly not comforting. But pale in comparison to Delhi. Bangalore on the other hand shows a negligible rise, probably reflecting the city's chocked infrastructure.

Coming to all-India numbers, the central bank itself sounds quite worried. So much so that it has no qualms about tightening liquidity further. Taking FY03 as the base, housing prices have gone up 2.5 times until the fourth quarter of FY10! The number of transactions of purchase of residential houses has gone up 4.5 times in the last 7 years.

Readers may recall that in was in FY03 that interest rates had started falling and led to a huge surge in home loan demands. The accompanying fiscal sops encouraged Indian middle class to leverage and buy homes. The presentation by HDFC does show that Indians are far better off than their global peers. However, this it recognizes is not the whole truth. There are pockets in Indian metros where buyers are making the same mistake as their peers in US and Europe did.

Non availability of jobs and poor economic prospects in the non metros bring these 4 cities at the top of the aspiration list of most Indians. At the same time limited space for expansion of housing facilities offers builders all the more reason to charge a premium. Affordable housing has so far remained a myth and only on paper. Deepak Parekh has suggested solutions like reclamation of land for cities like Mumbai to become more affordable. Is the government listening?