Real Estate Prices Hit The Fast Track in New Delhi, Mumbai

This is one question that is in the minds of almost everyone looking for property in Mumbai, Delhi or any other city where prices have spun out of control. However, speculation about real estate bubbles on the Indian market without looking at the facts is the work of a doomsayer, not an analyst.
So, let’s define a bubble first. 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 climb unrealistically fast. But is that the case today? It is definitely a possibility, but only in the cities where prices have actually skyrocketed beyond affordability. It can be argued that they have done so almost everywhere in the country, but the fact is that local people are still buying homes on as needed basis in most tire 2 and tier 3 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 are actually only talking of property in Mumbai and Delhi right now.
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 seen in the equity markets, and then later in the real estate and gold commodity markets-all three class bounced back convincingly.
There is, therefore, a concern that these two markets have demonstrated higher than expected enthusiasm, especially in the central parts in the case of Mumbai and Gurgaon and Noida for Delhi. A lot of investors have plugged n 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 Rs. 30,000/sq fit. Today, they stand at 38,000/sq fit.
The king of volumes that we have witnessed to the first half of 2010 has come down dramatically but the liquidity situation 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 Mumabi,is now spreading towards the other parts of the city.
There is yet another reason for the concern over a bubble building on the market. All developers who had ventured to buy land overseas or across India are now buying only in the primary cities. In other words, Mumbai developers are concentrating on acquiring land solely in Mumbai and the same is happening in Gurgaon. Investments are now chasing these tier 1 markets. If this continues, then there is certainly the probably of a bubble in residential property by the end of the year.
Banks are also eager to exit from their non-performing assets and convert them into liquidity. At the same time, there is a considerable amount of lending towards investors who have an unrelenting focus on high end projects. If this continues, we may see a number of high value NPAs in the market 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 their viability will change accordingly.
Courtesy: Et-Dtd-08-10-2010
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