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Friday, December 16, 2011

Property burst

Property bubble burst soon?

Property prices across India witnessed an unprecedented surge in the recent past. Take the case of Mumbai for example. Property prices in this metro city have increased by about 10 times in the last decade. High property prices, rising interest rates and uncertainty in the job market have kept the genuine buyers at bay. With demand tapering off due to the falling affordability factor, home sales across cities have witnessed a massive fall. It may be noted that sale of residential apartments have fallen in the range of 18-28% across major metros.

While the situation in the mid-income segment is not as grim, property registrations in the high end segment have virtually come to a standstill. Developers, lured by high margins from the luxury segment launched a number of projects during the boom period. But now these very developers have either slowed down their projects or have exited them as demand dynamics have turned sharply.

However, surprisingly what is interesting to note is that apart from the luxury segment volumes in the mid-tier segment have also been impacted. Volumes in cities like Ahmedabad, Pune and Hyderabad have registered a significant fall. Slump in the mid-tier segment is an important indication that the affordability factor has reached its peak and a correction is just around the corner. While price correction is already evident in the Mumbai market, the extent is not that huge. However, we believe that this is just the beginning. Since demand in metros is driven by investment too, the current downturn signifies that the buying interest may not resume anytime soon.

However, with the Index of Industrial Production (IIP) numbers registering a decline in October (first time in two years) the RBI may be prompted to ease its tight monetary policy stance, sooner than expected. This may provide a much needed fillip to the interest rate sensitive real estate sector. Nonetheless, it may be noted that apart from interest rates it is the irrational pricing that has impacted the volumes.

However, with home sales reporting a drop across regions (demand declining) prices may correct in the near term. Considering the tight liquidity position of many developers, we believe that correction is around the corner. Lowering prices is only way out of the current debt trap for leveraged developers. Price correction will ensure that the debt repayment cycle of the developers is not prolonged further. Thus, it will bring in a win-win situation for both buyers and real estate players.

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By Equitymaster – India's leading 'independent' equity research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian stock markets.

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