Is real estate bubble big enough to burst?

One of the primary concerns for the real estate sector in the coming year is very clearly this: Will the much talked-about asset bubble inflate further or will it burst?

2013 was mired in existing challenges such as subdued sales, piles of unsold inventory and builders going bankrupt. These problems will continue in 2014 as well, and, given economic instability, matters could become worse. However, it is very difficult to forecast anything in India as the real estate market is not subject to a fixed pattern. A great degree of political uncertainty, liquidity issues, high interest rates and cautious sentiments are expected to underpin the real estate sector in 2014 too. The only positive energy in this sluggish sector springs from the fact that the sales, though slow, are not stagnant.

India’s real estate market has been faltering for quite some time as the economy remains under stress. Realty prices have been surging in an unprecedented manner unlike income levels which are not rising. The price increase is mostly speculative and can be attributed to the predominantly capital-driven nature of the sector. 

It is an established fact that the real estate bubble in the developed world is a creation of the central banks’ strategy of keeping interest rates at a very low level. This excess money has also trickled into the real estate markets of emerging economies as overseas investors began to look for alternate investment avenues.

While the cause might be the same at home, the movement of capital across the various geographies in India needs serious analysis. Let us look at each of the significant markets to understand the creation of the asset bubble.

The MMR (Mumbai Metropolitan Region) market has a characteristic of its own (see MMR graph). There is huge latent demand but exorbitant prices make property unaffordable for most buyers. The price level here is way above the average price level of India but the annual acceleration is not very steep; in fact, it has been almost stagnant for quite some time. The realty cycle in MMR follows a long drawn pattern and has a low theta (angle of correction). The graph illustrates that the annual price growth post the 2008 meltdown touched 48 percent owing to substantial money coming into the MMR markets and then, after peaking at 54 percent in the second quarter of financial year (FY) 2010-11, the bubble started deflating.

After that, the MMR market with sky-high price levels and declining sales velocity was considered an unproductive arena and the funds inflow reduced. By sales velocity, we mean the ratio between monthly sales and total supply. The price rise after this, though persistent, has been comparatively slow. It is also interesting to note that even after a slow growth rate of prices, the pace of offtake has been slowing.

NCR (National Capital Region, which includes New Delhi), on the other hand, is an entirely investor-driven market. A lot of property is being sold in sectors which may remain uninhabitable for a long time. The price rise post FY 2010-11 continued to be sharp and persists even today. After touching the threshold of 27 percent year-on-year in the second quarter of FY 2012-13, the growth rate has started to peter out. One can already see the correction in the secondary market in NCR. The situation indicates that the existing bubble in tier-I markets like NCR and MMR are at the threshold of bursting. Owing to the high level of unsold stock in these markets, the prices might soon begin to tip off.

The real estate sector has taken another blow. In September, the Reserve bank of India (RBI) advised banks to exercise caution in financing purchases under interest subvention schemes, where the builder agrees to pay the interest for a certain period or till possession of the property. The central bank issued the advisory as these loan products had fine print defining liabilities of customers in case of defaults by developers.

"In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses and upfront disbursal should not be made in cases of incomplete or underconstruction or greenfield housing projects," the RBI said in its notification.

"Despite the poor economic sentiment, residential supply spiked during the January-June period. More than 65,000 units were launched in the leading cities compared to about 48,000 during the second half of 2012," says the report.

"In metro cities, there is a trend of big builders offering discounts on existing projects or launching new projects at subsidised rates, due to which the small builders are following suit," according to 99acres.com's Singh.

Analysts say property prices will remain under pressure for some time but are bound to rise in the long term. The shortage of housing in urban India supports their assessment.

If you are a first-time buyer, financial planners suggest going ahead with the purchase. In such a case, you house is an asset as well as your home, and helps you save on rent as well as get tax benefits. Investors, of course, need to be more careful. Stay away from high-priced properties as demand for affordable properties is much more than that for the premium ones.

Vacancy rate for 2013 signed off at around 18.2 percent, rising from 17.4 percent as of end of 2012. Hyderabad and Delhi NCR were the biggest contributors in terms of vacancy levels. This was largely due to the increased new supply as against the fall in absorption. Mumbai and Bangalore, on the other hand, witnessed marginal fall in vacancy. Poor macroeconomic conditions and skyrocketing inflation make consumers wary of spending leading to a stark decline in residential units from 196,000 square feet to about 172,000 square feet. Overall 2013 witnessed a decline of 12 percent in new launches as against 2012. Luxury segment saw a fall of 72 percent this year followed by a 25 percent and 13 percent decline in mid and affordable housing segments respectively. All this was due to the oversupply of units from the last three years builders were sitting on, say experts. Boman Irani, CMD, Rustomjee Builders, said: “All charges that we pay, whether it be towards taker’s premium, whether it be towards development charges, all are pegged against the ready reckoner rate. This means all those prices have gone up by 15-20 percent, and then add to that the funding cost, the profit added on, this would mean another 15-20 percent have gone up for the consumers.”