Real Estate Price Bubble

 | April 10,2010 06:30 pm IST


The housing boom is creating multi millionaires. It has become a wealth machine for the middle and the upper segment of the society.

A school of thought says that this trend of double digit returns on real estate would continue, whereas others argue that the rise in prices is a housing bubble and it would not take long for this bubble to burst and the prices to slash remarkably.


Although it has been speculated since a long time now that the real estate bubble would burst, nothing has happened till now. This shows that the increment in prices was more than just a bubble and there were indeed substantial reasons for the rise. Some of them which I could find are:-


Income - There has been a substantial rise in income levels, which has led to creation of demand of property.


Investment - The rich and the middle class has doubled in 5 years. With this substantial rise in numbers and the fact that real estate is one of the safest investments today, the demand is very strong.


Loan - The access to home loan has softened to a great extent. It has become cheaper and more accessible.


NRI Money - With huge NRI money being pumped into real estate, the demand side is very positive and hence a constant growth.


EMI - Simple calculations show that 60% of the EMI (equated monthly installment) is taken care of by the savings in rent and tax. This makes taking loans to invest even more lucrative.


What Lies in Future

The demand for residential property is still strong across the country. If we look at the prices a decade back, they were much less than what they should have been. The rise has started only after 2003, so it would be wrong to say the current run to be a bull run.


In short term (three years), prices should stabilize in metro markets, except kolkata where they should further rise (mainly because the comparative rise in prices there has been bleak). The number of buyers has come down because of anticipated correction in prices. The demand for housing though is still strong.


In medium term (seven to ten years), the fundamental factors point to a continued buoyancy. Specific overheated areas could see a correction. Investors, who are holding on to houses, expecting to sell at a peak, may start selling at the signs of correction.

That is when there will be a big supply coming in the market leading to small correction.


In the long term (over ten years), things will depend primarily on two factors - India's economic growth and the interest rates. As long as India's economic growth rate is high, a nation wide crash in property prices is ruled out. Yet concerns about a possible asset-price inflation has led the Reserve Bank of India to raise the risk weights on real estate loan that pushed up interest rates on home loans. A sharp rise in rates can surely bring the roof down on real estate market but the chances of this happening in the near future are negligible. Small increases would be borne by the bank and the borrowers by readjusting payments.


A sudden increase in new housing supply can cause stagnation but that should not cause anything beyond a temporary correction. An economic slowdown leading to a cut in incomes and investment can though be a strong enough reason for the prices to crash. None of these downturns though are likely to take affect in the near future, so the real estate market looks moving northward in coming months as well.