Rising Property Costs - Souring Housing Dreams!

Submitted by ARDutta on Sun, 2007-06-17 06:42

Property costs has risen in cities such as Mumbai, Bangalore and New Delhi over the past two years and even the richest NRI find themselves struggling to invest.

In some areas of Mumbai, property prices are equalling London/New York levels, although middle class salaries are rising fast with wage costs at top private companies, incomes remain a tiny fraction of those in the UK or US.

Sounds like the market is overhyped and overvalued. Realtors say it may be less than a year before the air gets sucked out of some of India's localised property bubbles. But such predictions have been common for months and the market shows no sign of cooling.

There is a lack of reliable data, but over the last two months, there've been lot more speculators coming into the market than first-time buyers and that's not encouraging. Prices are sky-rocketing in neighbourhoods in Gurgaon, national capital territory of Delhi.

In South Mumbai, spoilt sellers can pick from lines of willing buyers. Prices are sky-high for decent buildings and available properties, even for those with few millions to spend, can be counted on two hands. The sharp rise in prices has been driven by the easy availability of cheap capital.

But there are India centric factors at work too. Banks have been cavalier, with loans for housing rising by more than 50% year on year and credit to commercial real estate more than doubling. RBI in a belated move aimed at mitigating the risk of a housing-related banking crisis, increased the amount its own capital banks must set aside against property loans. It lifted the CRR by 50 points to 5.5 per cent. With consumer price inflation hovering about 7%, economists expect further interest rate rises early this year. This would affect the finances of thousands of middle-class Indians who have stretched themselves to buy homes.

With the economy driven by consumption, a drop in housing would hurt. The potential impact growth rates may be magnified if it is accompanied by a slump in the stock market.

As per economists: There is a wealth effect from rising equity prices, but not as a dominant determinant of Indian growth rates. The corrective process in the property market is for prices to plateau rather than crash.

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