Tough Times for Realty

[caption id="attachment_129" align="aligncenter" width="300" caption="Real Estae Slump"][/caption]

The scientific law that what goes up must come down has finally hit the Indian real estate sector. The boom has come to a grinding halt. Height interest rates and inflation have cooled the market’s growth though there is no crash yet. India is not alone in this experience. According to ‘Global Property Guide’, the global house price boom has stalled due to increased credit crunch, high oil prices and higher inflationary pressures on the world economy. Economy. Recent trends confirm that prices have not risen in key cities across India. Speculators have withdrawn, construction costs have skyrocketed; interest rates on home loan have doubled since 2006, financial institutions have cut down on their lending to the real estate industry, stock markets have crashed, end-user are postponing their deals to attract clients. All this has made the realty sector suffer one of its toughest periods, prompting the players to put their ambitious plans on the shelf. There are three main reasons behind the boom’s end in India. First. After a very long boom period, property prices had stretched out in Many Cities, the main indicator being the price/rent ratio, which compares the relationship between the buying prices of a property against its rental value. Secondly, high inflation has affected real seta negatively in several ways. Thirdly, Inflationary pressures led RBI to increase interest rates to about 13%, nearly twice as much compared to interest rates in 2005-06.

Next, high interest rates and inflation impact the housing market in two ways. At the micro level, end user may postpone their decision to purchase a new house or spend on renovation, if they anticipate higher interest rates discourage borrowing for housing loans. We all know how property prices in India rose remarkably in 2006 and the trend continued till a good part of 2007. Parcels of land were auctioned for fancy figures prompting several observers to warn of a property bubble.. Retrospectively, while the fear may not have been unfounded, a pan-India generalization is uncalled for. Price increases in several places were supported by strong fundamentals such as rapid business expansion and increasing real wages. On the other hand, speculative motives are clearly at play in several segments of the market based on international experience, over regulated property markets are more prone in the form of FDI restrictions on real estate zoning and building regulation, high stamp duties and capital gains taxes or bureaucratic hurdles. Another interesting fact is the increasing demand for second homes. While first-home buyers are postponing their decisions, many homeowners are going for their second homes in India. There has been a 20%-20% increase in second-home purchases in the last four years. An expert says the second home concept contribket and is in fact providing a breather to developers affected by the ongoing slowdown. With India’s GDP estimated to grow at a healthy 8% as compared to many developed economies, the India story still has a lot of steam left in it for continued growth. New Delhi, Mumbai, Bangalore and Hyderabad are ranker among the world’s top 100 centres of commerce. According to a recent research by NCAER, the top 20 cities in India are projected to have their house hole income grow at 10% annually over the next eight years. With rapid urbanization, around 45% of the population will be living in towns and cities by 2050, up from 30% now. The development of India’s real estate would greatly benefit from liberalization of property ownership and FDI laws, increase in housing loan, tax considerations, rules on repatriation of profits and increased transparency in regulations.