Indian property bubble

The Indian real estate sector is collapsing due to increasing costs of financing. Real estate projects in India take a long time to complete due to a complicated regulatory mechanism. Several of India's publicly traded real estate firms are in debt. The inventory of unsold real estate assets is growing and it is expected the market will undergo price corrections. According to the Mumbai-based market research agency, Liases Foras, 30% of the transactions in the real estate sector are done with black money. Experts expect new property prices to fall up to 50% in the next three months in Tier 1 cities.

In 2006, Himanshu Joshi, the Director of Monetary Policy Department, Reserve Bank of India, raised concerns about the rapid growth of the housing market and its sustainability. The paper said that the house prices in India were correlated more with interest rates and credit growth, and very little with the growth of real income.

In a September 2013 interview, Venkatesh Panchapagesan, the Head of Century Real Estate Research Initiative, IIM, Bangalore, said that the weakening of the rupee and lack of credit in the sector would cause prices to fall. He also said the prices should be falling faster, but due to the lack of transparency in the sector, it is not doing so.

Recent history

In March 2005, the Government of India permitted 100% foreign direct investment in construction and development projects. Before that only non-resident Indians and persons of Indian origin were allowed to invest in the real estate sector. Foreign investors could only invest through wholly owned subsidiaries and partnerships with Indian firms. However, foreign investors were not allowed to hold land for speculative purposes.

In July 2013, the Reserve Bank of India increased the bank rate by 200 basis points to 10.25%. This increased the cost of funds for the entire banking sector.

In July 2013, the State Bank of India took ownership of a condominium project called Teen Kanya in Kolkata after the builder, Bengal Shelter, defaulted on . About 400 people, who had paid up to 90% of the prices, found themselves in legal complications.

In August 2013, Orbit Corporation, a Mumbai-based real estate firm, defaulted on loans worths taken from LIC Housing Finance. Orbit Corporation had taken a loan of from LIC Housing Finance and defaulted on dues worth .

On 14 August 2013, the RBI put various restrictions on the amount of funds individuals and companies can invest abroad, in a bid to protect the value of the Indian rupee. Among the restrictions was a ban on the purchase of real estate abroad.

On 27 August 2013, the National Housing Bank, while presenting the quarterly update of the Indian housing index, Resider, that 22 of 26 indexed cities were seeing a fall in prices during the April–June period.

In September 2013, it was reported that about 650 million sq. feet of assets or about 6,00,000 housing units remained unsold at the end of June 2013, according to the research firm Liases Foras. Some builders were seen dropping prices and offering other incentives to buyers.

In October 2013, the RBI issued an advisory to buyers and banks. It asked banks to release sanctioned individual housing loan amounts in phases linked to construction stages, instead of releasing the funds as a lump sum. The unlinked loans used to act as cheap credit for builders. Builders used to encourage buyers to put 20% of the price of the housing unit as downpayment and apply for the rest 80% as a loan. These were called were 80:20 or 25:75 schemes. This loan was used directly by the builder for construction. The builders would sometimes pay the interest on the loans for a period. The reason for this was that individual housing loans drew an interest rate of around 10%, whereas housing project loans attracted an interest rate of 18%. The RBI also said that using such schemes may affect the credit rating of the buyer and expose banks to higher non-performing assets.

In July 2015, LIC Housing Finance put up the Orbit Residency Park project of Orbit Corporation, in Andheri, Mumbai, for auction. It had a reserve price of .

In May 2016, Real Estate (Regulation and Development) Act, 2016 (RERA) came into existence. RERA is considered to be as one of the landmark legislation passed by the Government of India for the betterment of real estate in India. The objective of Real Estate (Regulation and Development) Act 2016, is to reform the Indian real estate sector, by encouraging greater transparency, accountability and financial discipline.

The market size of the real estate sector in 2017 was US$120 billion which is expected to reach US$1 trillion by 2030. It is expected that the sector would have a contribution of 13% to the GDP of the country by 2050.
2019 HDIL defaulted payment to PMC bank
ILFS default
2018 RERA stringent provision
2019 NBFC like DHFL and India bull crises

Excellent performing Real Estate is a key to achieving higher sustainable growth rate, especially for the developing countries like India. Indian Property Bubble can be considered as the biggest obstacle that not only hindered the growth of real estate sector but slowed the overall growth of India.

Further reading

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References

{{DEFAULTSORT:Indian Property Bubble
Housing in India
Real estate bubbles of the 2000s
Real estate in India