“Real Estate prices in India will never go down and it’s the best investment in this country” – Most Indian people.
The emergence of a strong middle class, expansion and development of urban areas, a strong economy and positive investor sentiment, influx of capital from NRIs, etc. over the past couple of decades lead to Real Estate emerging as the 1 investment destination for people in our country. Until now, it was totally justified. Investments in real estate have consistently outperformed other channels with the median return in this sector being ~ 15-20%. Real Estate was considered a ‘safe bet’.
Now, people are starting to think otherwise. The much talked about (less thought about) real estate bubble has been growing rapidly(and inorganically). Will it burst? Shrink in size? Or will it continue to grow? My research and thoughts below.
Bangalore seems to be the only major market that’s doing well. The buying trends in this market are positive (both prices and number of properties sold are going up). Inventory levels(number of unsold apartments) of builders in most parts of the city are low and in general, there’s a positive sentiment amongst the people. In Bangalore, most people buy houses with the intention of living there and not just as an investment. Hence, this is fundamentally a sound market. Jaipur (The fastest growing Real Estate market ~ +60% YoY!) is another market which seems to be doing well.
Apart from this, other markets seem to be on the decline. Mumbai, NCR and Chennai are the hardest hit by this. It’ll take 4 years in NCR, 2 years in Mumbai and 18 months in Chennai to clear the inventory at current absorption levels. This is a negative indicator for the outlook of these markets. Though the prices haven’t dropped by much, the number of transactions are decreasing QoQ. Whats making things worse is that builders are refusing to lower their prices as this might cause panic amongst potential buyers. The fact that RBI is increasing their interest rate doesn’t help either. The situation is similar in Pune, Hyderabad and Kolkata though the magnitude varies.
So does this mean that this is the end of the road for Indian Real estate? I don’t think so.
We need to remember that this is India. And this is Real Estate. The market is driven more by people’s sentiment and less by logic.There’s a very strong emotion that people have towards their houses. Society ‘expects’ people in their late 20’s to buy their first house. Relatives throw questioning glances at young married couples who choose to rent houses rather than buy one of their own. There’s a strong increase in the number of people in their 40’s who’s first investment in Real Estate gave them amazing returns and are considering a 2nd investment in the same sector. There’s a sense of pride associated with owning a home in India which you will not find in other countries.
So what’s the verdict on the Real Estate bubble? I think the bubble will shrink in size, stay in the new size for a brief period of time before it starts growing again. Hopefully this time, more organically.