The Hindu Business Line : Need for a `real' cooling off

News of a drop in speculative bookings of apartments is welcome, as the property market was increasingly falling into the grip of investors and speculators.

Artificial rise in values is putting housing beyond the reach of those in real need of it. - S. Siva Saravanan

"Real estate is fast becoming a speculative commodity... The siren of caution in the real estate market is now ringing loud and clear... southwards is where prices must go, but the correction has to be gradual."

Mr Deepak Parekh,

Chairman, HDFC, in the company's Annual Report 2005-06.

When a person of Mr Deepak Parekh's experience and eminence sounds a note of caution, you can ignore it only at your own peril. Mr Parekh has been cautioning about the unbounded rise in the property market for the last few months now.

Indeed, the property market in India has taken off vertically in the last two-three years, especially in Delhi, Mumbai and Bangalore where values have surged on the back of intense speculative activity; anything between a quarter to three-fourths of property demand is said to be from those buying for investment rather than habitation.

The real estate sector has been growing at a frenzied 30 per cent per annum in the last few years which is remarkable for a country that is used to single-digit growth rates. Yet, the sector as a whole contributes to a mere 4 per cent of the country's GDP; in contrast, a single company, Reliance Industries, contributes 2.8 per cent to the GDP through its revenues. Surely, more is possible from a sector where there is an estimated shortage of 19.4 million housing units, 6.7 million of that in the urban areas, which have seen the maximum development in recent times.

Basis for boom

The last few years have been extremely good for the industry as the demand for housing was driven by a confluence of favourable factors such as cheap loans, generous tax-breaks for loan repayments, and rising incomes. Thanks to these factors, buying a property has become a more affordable proposition.

The Index of Affordability of Housing (property prices divided by annual income), which has dropped from 22 to 4.8 in the last 11 years, tells the story succinctly (see graphic). Simply put, it is five times more affordable now to buy a house than a decade ago.

Interestingly, the last two years have seen a small rise in the index — it fell to its lowest level of 4.3 in 2004 — which points to the fizz that has built up in the market in the same period. This fizz — let us not call it a bubble as yet — is directly linked to the period of prosperity in the stock market which came to a rude halt in May.

Much of the speculative activity in the property market was driven by money being made in the stock market. It is no coincidence that in the two months since the correction in the stock market, have come reports of a plateauing of property values in Delhi, Bangalore and Mumbai — known speculative markets.

Make no mistake, it is not a correction yet. That will come when Mr Deepak Parekh's prophecy of a 20-30 per cent fall in values happens. But there is certainly news of a drop in speculative bookings of apartments, a practice that was going out of hand especially in Delhi and Bangalore.

This is good news because the property market was increasingly falling into the grip of investors/speculators rather than genuine buyers causing an artificial rise in values and putting housing beyond the reach of those in real need of it.

Entry of property funds

Meanwhile, winds of change are beginning to blow across the industry. Financing is set to become institutionalised following the decision by the stock market regulator, SEBI, to permit real estate mutual funds in the country.

Opinion is divided on the impact that big money coming in as investment can have on the market. While it will give a big boost to real estate development, it could also lead to an artificial appreciation in values all over again. This is because land is scarce in cities, where most of this money is likely to find its way. Legal tangles caused by the Urban Land Ceiling Act and the stringent stipulations on floor space index (FSI) have already made land expensive in cities.

When real estate mutual funds do come in — and that could still be some time away as SEBI has yet to notify regulations — they will add to the increasing number of property funds and venture capital outfits that are already in the market. HDFC and ICICI Ventures have set up their own property funds of Rs 750 crore and Rs 1,000 crore respectively.

Positive outlook

The trend appears positive for the industry but there could be some turmoil along the way if values do not correct quickly. There are a couple of factors to support the belief that a correction could be setting in soon. First, housing loans are becoming expensive and the trend appears to be one of a further increase in rates in the medium term. This will slam the brakes on demand fuelled by cheap and easy availability of finance.

Second, the turmoil in the stock market means that much of the oxygen that was fuelling the property market appreciation will now be cut off. No more will big profits from the stock market find its way into real estate.

These will, together, take away the speculative fizz from the property market and ensure that only the genuine buyers remain. A correction such as this will be healthy and is highly desirable in the interest of the property market, which has reached dizzy levels and needs a soft landing.

More Stories on : Insight | Real Estate & Construction | In Focus

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page