The Indian property bubble refers to the concern expressed by some Indian economists that housing market in some major Indian cities may be in a bubble.
The real estate sector is thought to be collapsing due to increasing costs of financing. Real estate projects in India take a long time to complete due to a complicated and corrupt regulatory mechanism. Several of the 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 Mumbai-based market research agency, Liases Foras, 30% of the transaction in the real estate sector is done with black money. Demonetisation of 500 and 1000 rupee notes by Prime minister Modi proved to be the last straw that broke the black money camel's back. Experts expect new property prices to fall upto 50% in next three months in Tier 1 cities.
In 2006, Himanshu Joshi, the Director of Monetary Policy Department, Reserve Bank of India, published a paper which 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 investment 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 ₹1.77 billion (US$28 million). 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 ₹96 crore (US$15 million) taken from LIC Housing Finance. Orbit Corporation had taken a loan of ₹3.25 billion (US$51 million) from LIC Housing Fiance and defaulted on dues worth ₹9.55 billion (US$150 million).
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 inder, Resider, that 22 of 26 indexed cities were seeing a fall in prices during the Aprilâ€"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 adivisory to buyers and banks. It asked banks to release sactioned 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. Buldiers 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 ₹1.25 billion (US$19 million).
Legal aspects
Under Indian law, the legal rights of a buyer does not change if a lender takes ownership of a project from a defaulter. The buyer can take the possession of the apartment when the project is completed or can sell it to another buyer.
There are two separate issues which are often confused and mixed up with each other. High price can be due to a bubble but that need not be the only reason. High price can also be due to 'Permit Raj'. A brief explanation is as follows. Often the real estate sector is subject to considerable controls and regulations that are over and above those that are warranted to take care of congestion, orderly development, and minimising negative externalities. Such controls lead to a restricted supply and so the price can be high. Such a high price can be stable and persistent over a long period; this is typically not the case when there is a high price due to a bubble. It is widely believed that the Permit Raj has been abolished with the economic reforms in early 1990s in India. However, this is only partially true. The Permit Raj was abolished (or reduced) in the manufacturing sector but not in all sectors. One important sector where it was not abolished is the real estate sector in India. So, the supply is restricted and the price is high. For more, see Singh, Gurbachan, 2016, Land Price, Bubbles, and Permit Raj, Review of Market Integration, volume 2, issue1 and 2, p. 1-33.
References
Singh, Gurbachan, 2016, Land Price, Bubbles, and Permit Raj, Review of Market Integration, volume 2, issue1 and 2, p. 1-33.
Further reading
- Joshi, Himanshu (2006). "Identifying asset price bubbles in the housing market in India: Preliminary evidence" (PDF). Reserve Bank of India: Occasional Papers. 27 (1): 73â€"88.Â
- J. D. Agarwal; Aman Agarwal (2008). "Money Laundering : The Real Estate Bubble". Finance India. 22 (1): 57.Â
- Mantu Kumar Mahalik; Hrushikesh Mallick (2011). "What causes asset price bubble in an emerging economy? Some empirical evidence in the housing sector of India" (PDF). International Economic Journal. 25 (2): 215â€"237.Â
- Vijay Kumar Vishwakarma (2012). "Is There A Periodically Collapsing Bubble In The Indian Real Estate Market?". Journal of Applied Business Research. 29 (1): 167â€"172.Â
