Real estate prices sky-scrape

Mumbai: The sole fact that is troubling buyers & investors looking for property in Mumbai, Delhi or any other metro city is that prices are spiralling beyond reach. However, speculating about real estate bubbles on the Indian market without looking at the facts is the work of a doomsayer, not an analyst.
Here comes the concept of the ‘bubble.’ In a normal market, prices do rise, but only in tandem with the rate of inflation or a rise in middle-class incomes. Real estate enters bubble territory when prices soar spectacularly fast. But the question is whether the situation is the same, given the present scenario in the real estate sector. It is definitely a possibility, but only in cities where prices have actually skyrocketed beyond affordability. It can be argued that such is the situation almost everywhere in the country, but the fact is that local people are still buying homes on requirement basis in most tier-II and tier-III cities. Nor is the supply in most of those cities either overly constrained or curtailed. So, when we talk of the possibility of a bubble, we’re actually emphasising on property in Mumbai and Delhi.
The real estate market in Delhi led the correction, and Mumbai fell in line next. Both bounced back after the introduction of stimulus packages and the government’s actions in restructuring debt. During the revival phase, a large amount of capital sitting on the fences immediately saw an opportunity. This was first observed in the equity markets, and then later in the real estate and gold commodity markets – all three classes bounced back convincingly.
There is, therefore, a speculation that these two markets have demonstrated phenomenal enthusiasm, especially in the central parts in the case of Mumbai, and Gurgaon and Noida for Delhi. A lot of investors have pooled in considerable amounts of capital in these regions, and the values, on an average, have now gone 30% higher than the last peak. Some of the residential developments in central Mumbai in 2008 had peaked at 30,000/sq ft. Today, they stand at 38,000/sq ft.
The kind of volumes that have been witnessed in the first half of 2010 has fallen dramatically but the liquidity figures in the market has not dropped, and neither has the appetite for investment. In fact, the same enthusiasm, which had been previously contracted by the central parts of Mumbai, is now spreading towards the other parts of the city.
There is yet another reason for contemplation over a bubble building on the market. All developers who had ventured to buy land overseas or across India are now purchasing only in the primary cities. In other words, property developers in Mumbai are concentrating on acquiring land solely in Mumbai, and the same is happening in Gurgaon. Investments are now focussing exclusively on these tier-I markets. If this continues, then the probability of a bubble in residential property by the end of the year is certain.
Banks are also eager to exit from their nonperforming assets and convert them into liquidity. Simultaneously, there is a considerable amount of lending towards investors who have an unrelenting focus on high-end projects. If this prevails, a rise in the number of high-value NPAs in the market may soon be noticed in a couple of years. However, we must remember that some of the larger high-value residential projects in Mumbai will undergo at least two property cycles before completion, and that evaluations of their viability will change accordingly.

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