Pop goes the bubble2 min read . Updated: 02 Jul 2011, 05:54 PM IST
Pop goes the bubble
Pop goes the bubble
Real estate prices are already above their 2008 highs in many cities, though the ratio of house prices to incomes may still be below that peak because of the smart recovery in the Indian economy since the global economic crisis. Yet, median house prices in the main cities are close to Rs1 crore, far beyond the reach of most urban families, especially since home loan costs have been inching up in step with the anti-inflation monetary tightening by the Reserve Bank of India.
The high prices of real estate are already weighing down on demand. Both sales volumes and registrations have been falling in recent months. Inventory of unsold homes is piling up even as developers continue to build new residential projects. This newspaper reported on 14 February that a survey of 2,400 housing projects in the nation’s commercial capital, conducted by Liases Foras, a property research firm, showed there were around 88,000 unsold homes in the Mumbai metropolitan region.
The chief executive of the firm had told Mint that up to 22 months may be needed to clear the inventory in cities such as Mumbai, New Delhi-National Capital Region, Chennai and Hyderabad. This inventory could increase if buyers stay away while builders continue to finish projects in the hope of generating sales.
A price correction thus seems overdue unless builders have the financial muscle to hold on to inventory despite rising interest rates. That seems unlikely. And with it could come more instances of defaults by real estate developers, something we saw in the middle of 2009 as well when they could not pay their dues to banks and bond investors.
However, the sheer frequency of overheated real estate markets is a symptom of a deeper malaise—the lack of policy focus on urban issues that makes India one of the most expensive real estate markets in the world. India has far few big cities for a country of 1.2 billion people. The existing cities have deteriorated because they do not have empowered mayors to manage them, are often used by state-level rural politicians as machines to generate cash, have been unable to broaden their revenue base through higher property taxes, have no rental markets to speak of thanks to outdated rent control and tenancy protection laws, and have failed to invest in infrastructure. Urbanization is an inevitable and welcome trend for a country moving up the development ladder. Many states—especially in the west and the south—may already have larger urban populations compared with rural ones. High real estate prices only force people to stay in slums. It is time the popping of a real estate bubble becomes an occasion for a new approach to cities.
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