Indian real-estate sector – victim of irrational exuberance

I have been reading a lot of news and developments over India’s real estate sector. All I can say they created all the problems for themselves. I can’t say much about commercial real estate but in residential real estate market one could see problems right through. I have written plenty of postson how difficult it is to buy property in Mumbai and how expensive it had become.

In Navi Mumbai, builders were either busy building luxury properties or those with penthouses, 5 bedroom apartments. The reason they said was demand was for such properties.  One could never understand who would buy those properties? If people had that kind of money they could very well buy property near the area of work (which is usually South Mumbai) and save travel time as well.

The people wanting to live/shift in Navi Mumbai were those that could not afford housing in Mumbai. There was a need to develop smaller flats at reasonable prices but at times of exuberance (no matter how irrational it could be) basics are ignored.

Each of these properties became highly  expensive and beyond budget for most of the people.  The high prices were then pushed across sector and most of the properties started quoting at rates never seen before. There were properties which were almost 20 years old and quoted same rates as a new one and one wasn’t sure whether it could last another round of rain. The concept of depreciation wasn’t applicable at all.

The exuberance fed itself and there was a huge bubble in the making. This trend was seen across Indian cities. The builders , brokers etc all behaved as if the market would go on like this, huge demand is there etc. The prices used to rise every week by almost 500 Rs per sq feet in some cases (amounting to additional Rs 5,00,000 for a 1000 sq ft property in a week!!) They forgot that incomes of individuals are revised usually once in an year and not everyone is a millionaire in India.

The real estate dream is over. In the euphoria they had come out with grand equity share offers which were prices at a huge premium. Now all are down by almost 70-90% and are still reeling. Their collapse also led to a huge concern on mutual funds whose fixed maturity plan offers weer on the brink of default. There are concerns on banks over increase in real asset non-performing loans as well.

Very cleverly, the real estate sector seemed to have passed the collapse to the global crisis. They are asking for help from RBI, government and whichever source. They are threatening that without support there would be massive unemployment etc.

However, despite all the mess, we hardly get to hear about any reasonable decline in housing prices. At the most you hear is builders planning to offer a 5%-10% decline when prices have increased by almost 300-400% in past 3-4 years!!  This discount was available as it is even in good times.

The government should only assure support if they reduce the prices substantially. Otherwise, it will not solve the problem. The builders need to be taught a lesson and understand building homes for others isn’t only about crazy profits and that too forever.

8 Responses to “Indian real-estate sector – victim of irrational exuberance”

  1. Real Estate/Buisness News » Blog Archive » Indian real-estate sector - victim of irrational exuberance … Says:

    […] Original post by unknown […]

  2. Online Gamblers Blog » Blog Archive » Indian real-estate sector - victim of irrational exuberance … Says:

    […] unknown wrote an interesting post today onIndian real-estate sector – victim of irrational exuberance …Here’s a quick excerptI can’t say much about commercial real estate but in residential real estate market one could see problems right through. I have written plenty of postson how difficult it is to buy property in Mumbai and how expensive it had become. … […]

  3. Real Online Gambling Info » Blog Archive » Indian real-estate sector - victim of irrational exuberance … Says:

    […] unknown wrote an interesting post today onIndian real-estate sector – victim of irrational exuberance …Here’s a quick excerptThey forgot that incomes of individuals are revised usually once in an year and not everyone is a millionaire in India. The real estate dream is over. In the euphoria they had come out with grand equity share offers which were prices at … […]

  4. ishani Says:

    very well said that Indian real estate is victim of irrational exhuberance. However, we should also not make the mistake of assuming that it will get over very soon… and should avoid few of the common mistakes of a slowdown i.e. http://www.indianpropertyreview.com/2008/11/common-mistakes-to-avoid-during-a-slowdown/

  5. Housing Market continues to increase prices « Mostly Economics Says:

    […] prospective customers. However, such things don’t apply to real estate industry. They drove irrational exuberance and want to continue to live by it (see this article on DLF and Unitech practices by Mint and a […]

  6. Siva Ram Says:

    Even though the interest rates reduced to 1%, it is not useufl to the middle class who are the back bone of india and occupies 90% of the population. They earn less than Rs.15,000/- per month. They are elegible to get loan for Rs.5 lakhs only. With Rs.5 laksh now-a-days what can we buy in real estate busines. Some smart real estate businessmen will say that, we are planning OR we are constructing houses for middle class segment. It is not houses, It is flats. It should be in less then 550 sft. And it costs about Rs.10 laksh. Most of the people did not have the eligibility to get that much loan. Do you know that, the Real Estate Boom creaters dog house [kennel] is more than 550 sft. The government, the banks, the Railways, and the 10% rich men getting money from the taxes collected and purchases made by the Middle Class people in India. But middle class people who are in a position to buy an independent house in 2004 now were pushed down to adjust in 550 sft Flat. Is this right.

  7. Jun Says:

    A lot of other countries are faced with the same problem. People need housing, but not all, even with proper jobs, cannot afford even the cheapest piece of real estate. I agree with Siva that even with just 1% interest, this is still not very helpful. Best thing to do is either a raise in average income of the middle class or don’t put interest rates at all. I think some governments or developers can afford putting up housing for the people and simply earning back what they spent…

  8. Punta Gorda real estate Says:

    Governments could do it all but do they want?

    S

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