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Real Estate Price Bubble in India
January 29, 2008
Deja Vu - that is what I feel when I see the current real estate prices in India. The prices for land and housing in India has been on a tear. The prices have shot through the roof (pun intended!) not only in the main cities but in the second and third tier cities as well. It looks like the days of the internet boom when NASDAQ was increasing in leaps and bounds. Finally the internet bubble burst and left behind a trail of destruction in terms of investment and speculation. The real estate prices in India seems to set for a similar course.
One need not look back as far as the internet boom to realize what is in store for real estate prices in India. The recent bursting of the housing boom in US is a more accurate reflection of the scene currently in India. The only difference is that the bursting of this bubble is not yet over. It might take another 2 more years before the housing prices in the US reach bottom.
The rise in land prices in India has been so drastic that there seems to be no logical reason behind it. Much of the rise in price is due to speculation. There are land brokers and real estate agents who pay an advance for a plot of land and then resell the land to a third party for a huge profit. This practise has been so rampant that it has created huge artificial demand.
This method of advancing a token amount and then flipping the land to a third party in effect creates highly leveraged conditions. High leverage, in layman's terms means the method to generate profits without putting the required capital. Using leverage is required for certain business activities, but when it is carried out on a scale that is not controlled, it leads to a highly unstable situation.
When the prices start to fall, these speculative interest will collapse as a house of cards. Panic will set in and people will just stop buying houses or property. This will create a huge surplus supply and the prices will bottom out.
In a normal cycle this increase and decrease in prices will usually be on a slower pace. However, when the increase has been so drastic, the fall in prices will be even more drastic. The fall in prices will also create a huge vacuum in demand as genuine customers of real estate and housing property will wait to see how far the prices will fall.
This is what is currently happening in the United States. The crash of the real estate prices in India is guaranteed. The only question is when. As many said after the internet boom & bust, what has gone up will have to come down - gravity still rules!
Posted by liveit at January 29, 2008 2:16 AM