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The real-estate boom is growing into an unsustainable bubble that is giving rise to dangerous speculation.

C. J. Punnathara

Mr Thomas Joseph, a Kochi-based advocate-turned-bookshop-proprietor made Rs 7.5 lakh in three months, by doing virtually nothing. He merely paid a token advance for a 10-cent parcel of land (one-tenth of an acre) at a Kochi suburb at Rs 1.5 lakh a cent and then re-sold the ‘property’ at Rs 2.25 lakh a cent — within the stipulated three-month contracted period. The ultimate purchaser paid in full, bought the land and executed the deed. Mr Joseph just walke d off with Rs 7.5 lakh — an amount that an average Indian worker would take close to a decade to earn.

Such get-rich-quick stories are becoming commonplace in many of India’s boom cities — New Delhi, Mumbai, Pune and Bangalore. So much so a recent issue of The Economist predicts that, “Looking ahead the question is no longer whether, but by how much, prices will fall. Property prices in Mumbai and Bangalore have already started to slip this year as mortgage rates have increased sharply.”

But the question is whether this price slip will persist through. Maybe it will. Strong indications are that mortgage prices, or home loan rates, have touched their peak and have nowhere to go but down. In their battle to consolidate the housing loan market, banks are already slugging it out, sharply cutting rates and calling it a monsoon bonanza.

Simultaneously, the inflation rate has been on a course correction for over 10 weeks now, reaching the more-acceptable four per cent levels. Interest rates are expected to follow suit and the availability of cheap finance could push up real-estate prices once again. Experts warn of heightened demand leading to price booms, and the possibility of a real-estate bubble.

To quote The Economist again: “The only Asian country from where the bubble leaps out from these charts is India, where average prices have risen by 16 per cent a year over the past four years, well ahead of the average income .

It is the only country where house prices have surged by more than in America (around 11.5 per cent per year).” Admittedly, unsustainable demand is propelling real-estate prices to new highs. But people like Mr Joseph are laughing all the way to the bank. Even if a large number of deals are speculative, somebody has to cough up the money at the end of the day when the transactions are completed. Where are these huge funds coming from?

India’s new 20-plus generation could provide a part of the answer. The young BPO workers, software engineer, street-smart bank executive and the techhy have money to burn — earning more than ten times what their parents could. While some splurge on ostentation, a good number, taking advantage of the cheap and attractive housing loan market, are investing in land and property. The income-tax waiver on housing loan interest is a further sweetener as it makes the loan incredibly cheap and real-estate investments all the more attractive.

Reflecting this surge in demand, the corpus of housing loans from public sector banks has soared by 122 per cent in three years, from Rs 38,703 crore in March 2003 to Rs 85,832 crore in March 2006.

According to Global Property Guide, an international research firm, equivalent apartments in South Mumbai now cost three times more than in Shanghai and not much less than Tokyo, though Indian incomes are much lower.

Another part of the answer on fund sources could be the pattern and flow of NRI remittances and deposits into Indian banks. In a sharp move to contain the burgeoning foreign exchange reserves and check the rupee’s rapid rise against the dollar, the Reserve Bank of India had slashed interest rates for foreign currency accounts to sub-LIBOR rates as also NRI domestic currency returns.

Many found it increasingly untenable to bring and park their funds with Indian financial institutions. So they began to circumvent the official transfer channels and opt for the grey, ‘hawala’, path.

This is evident in the huge fluctuations in private receipts into India under the Balance of Payments of invisibles on the Current Account, which provide a broad indication on the trend and direction of inward remittances from NRIs.

Private receipts, which was around Rs 83,115 crore in 2002-03, spurted to Rs 1,01,798 crore in 2003-04, before falling to Rs 94,439 crore in 2004-05 and recovering to Rs 1,08,891 crore in 2005-06.

These major fluctuations indicate that neither the pattern nor the volume of remittances into the country has stabilised — implying that there have been major diversions through the hawala routes. And this huge wealth has the potential to destabilise the Indian real- estate market and create a bubble economy that has no relation to average Indian income or the pace of economic growth.

Similar fluctuations have also been observed in NRI bank accounts. On a net basis, the cumulative inflow into the foreign currency and rupee denominated accounts of NRIs in India increased from $2,976 million in 2002-03 to $3,641 million in 2003-04, before registering a reverse flow of $962 million in 2004-05 and regaining positive territory at $2,789 million 2005-06.

While there can be no doubt that the aggregate income of Indians abroad has also been rising, it is anybody’s guess where these funds are headed. There are strong indications that a part of this wealth is taking the hawala route and entering India’s burgeoning real-estate sector.

Stories of murder and mayhem of the hawala ‘conduits’, who undertake the deadly dispatch of cash to the final recipient, have been proliferating from smaller Indian towns such as Thrissur and Kozhikode to the major metros of Mumbai and New Delhi. Much of the illegally transited wealth bears no official records and finds havens in the country’s lucrative real estate markets.

The government is left with the unenviable choice of containing the rupee and propelling exports or raising the interest rates for NRIs and throttling hawala transactions.

Either way it stands to lose. And having tasted the high returns, there is no guarantee that a hike in NRI interest rates will stymie the hawala route and real-estate investments. The bubble could grow bigger, but it could very well burst.

More Stories on : Economy | Real Estate & Construction | NRIs

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