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Is real estate next in line to collapse?

Unless govt deflates the housing bubble in an orderly manner, the collapse by market mechanism will surprise generations

Shishir Asthana 

Real estate prices could fall substantially
Real estate prices could fall substantially

While the spotlight so far has been on the rupee and the equity markets, prices have started to bear the impact as well. A Business Standard report points out that of the 26 cities surveyed by the National Housing Bank (NHB), as many as 22 including Delhi, Mumbai, Pune, Bangalore and Chennai saw a drop in property prices during the April-June quarter, compared to the first quarter of this calendar year. An all-round squeeze in liquidity and dearth of buyers have led to a fall in prices across the country.
 
Developers who were holding on to their prices despite sluggishness in demand have blinked first. Yet the chairman and managing director feels that there is more to come.
 
A report by of says that the endgame of speculation in Indian has begun. Bhandari says that a multitude of factors are converging after a decade, setting the stage for a deep correction in The story in India has all the ingredients of a making of a a la Mississippi Scheme, the South Sea or the Tulip Mania.
 
prices in India are among the highest when compared on a per capita basis. Rent yield in India, which can be used to compare returns within across countries as well as to compare across asset class, is one of the lowest in the world. Indian earns a rent yield of only 2.7 per cent compared to 4.7 per cent in the US and 4.5 per cent in Japan.
 
Within emerging markets, Indonesia has a yield of 9.3 per cent while Philippines investment earn a rent yield of 8.6 per cent. The only other country which has a 2.7 per cent yield is China which is already facing a bank-fuelled like scenario in its sector, which its government is desperately trying to control.
 
is sucking out liquidity like a sponge and the sector that will be the worst affected is Bhandari says that the fall in property prices is likely to start from the deleveraging cycle by Indian banking sector which is running a multi-decade investment to deposit ratio of 108 per cent. Balance sheets are expected to be deleveraged over the next three-four years. The previous deleveraging cycle in 1997-2003 saw prices correct by 50 per cent in Mumbai Metro Region.
 
Adding to the liquidity crisis is the likely exit of private equity (PE) players from the market. Average life of private equity in is seven-eight years. Year 2013 marks the beginning of private equity returning back to shores. Manish says that PE players entered India at an exchange rate of 45; they will now be exiting at around 70 levels a loss of nearly 50 per cent in currency conversion itself. The exit of PE funds will create a distress sale situation in the market, shortly leading to depressing price situation for the next 18 months.

Bhandari feels that unless the government deflates the housing in an orderly manner, the collapse by market mechanism will surprise generations on how a nation on its way to prosperity by speculating on a piece of land eventually lost a fortune.

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