The Indian Real Estate Market

In the previous couple of articles we have discussed about the real estate markets in the United States as well as Japan. These markets were of developed countries and their economies are largely self sufficient. However, India is a developing economy with a very different case. It has seen rapid growth in the 1990’s and the early 2000’s. However, this rapid growth has largely been driven by the service exports to economies like the United States. Thus, globalization has changed the economy completely and amongst one of the biggest changes has been the real estate market with its new found volatility. In this article we will trace the history of the Indian real estate market from being a conservation, safe haven market to being a speculative, leverage driven market.

1980’s Conservative Market

Prior to the 1980’s India was largely a poverty ridden country. The country had gained independence in 1947 after 200 years of slavery to the British. This had left the country poverty ridden and destitute. However, the poverty had also created an extremely risk averse mindset. The Indian population had seen exploitation at the hands of the British as well as the local landlords. Therefore, they were increasingly averse to debt of any kind. The economy was based on hard work, saving, investments and then purchasing with cash. Debt, of any kind, was looked down upon.

As such, the real estate market in India prior to the 1980’s barely saw any action. This is because people were not willing to borrow to invest in properties. Also, their incomes were limited and therefore the only way that these people would buy a home would be after saving for multiple years.

1990’s Boom and Bust

A lot of this changed in the late 1980’s and early 1990’s. India witnessed one of its first bull market runs. The stock market was soaring and investor confidence was extremely high. A little known broker called Harshad Mehta had emerged from the streets to become one of the biggest names in the stock market.

Many people booked their gains and became millionaires overnight. Once they had realized their gains, investors found real estate market as the perfect safe avenue wherein they could invest their money. As such, this increasing amount of money flooded the real estate market creating a boom scenario. The same market which had not moved even a few percentage points in the past few years was now moving over 10% per annum!

However, the party soon came to an end. Regulators found out that Harshad Mehta had been swindling money meant for bank investments. He had been using this ill gotten money to pump up the market and sell his investments at inflated prices. Once the crony scheme was discovered, the market came crashing down. The stock market index was reduced to 50% of its peak. This also had an effect on the real estate market as investors sold their holdings to make good their losses in the market. As such, the property market experienced an extreme downward pressure and prices dropped by over 40% in a couple of years.

2000’s Boom

The period from early 90’s to early 2000’s saw a depressed real estate market. This once again changed from the year 2000 onwards. Globalization had bestowed many benefits on India. Since India had a large English speaking, technologically advanced working population, a huge chunk of the Information Technology (IT) and Information Technology Enabled Services (ITeS) found its way into the Indian markets. The average unemployed Indian youth suddenly had a swanky job with a decent paying salary.

However, more importantly, American jobs also brought American culture to the real estate markets. More and more of the newly wealthy Indians abandoned conservative values and borrowed to buy their homes. Mortgages, which were the exception at one time suddenly, became the norm.

This created a bubble of unseen proportions in the Indian market. Firstly, millions of buyers which were not there in the market suddenly had the purchasing power. Moreover, banks were lending heavily to these people. Therefore the newly created purchasing power suddenly flooded the market. The conservative risk-averse Indian market had suddenly started taking risks. Prices rose at more than 15% per annum. This has continued for over a decade. Therefore, the home prices anywhere in India today are at a multiple of at least 6 times what they were in the late 1990’s. This has been despite the one meager slowdown that was witnessed by the market in 2008 in response to the United States subprime mortgage slowdown.

2010 Onwards Stagnation

By the year 2010, the aspiration of the middle class Indian buyer has still not been satiated. However, reality of unsustainable prices seems to have caught on. Although, almost all middle class workers aspire to buy a home, very few are able to do so at the inflated prices that have prevailed in the market since 2010.

As such, the property prices in the market have stagnated since 2010. The worldwide prescribed standards for an affordable mortgage states that no more than 35% of your net income should go towards your monthly mortgage payments. However, there does not seem to be a single Indian city where the average worker can purchase a home on that kind of budget.

This has given rise to the belief that the Indian real estate market is surely in a bubble. At the present moment, there is a wait and watch standoff between the developers and the buyers. Both counterparties are hoping that the other will relent. However, neither party has relented for around 5 years now! How long can this stand-off sustain is the question that will be answered by time.


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