Thursday, July 07, 2011

India Real Estate Market About to Crash Or Consolidation?

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It is not easy to find an analyst on the street who will be mildly bullish on the real estate market leave along someone who is irrationally bullish. In a scenario where the market seems to be short the real estate market, the laws of contrarian investing state that “when the whole market is long/short a trade, the trade may not fructify” which is what is happening to the real estate market in India. Fundamentally, the market is poised on a knife edge with multiple triggers slowing the market down. Some of the macro pointing to an imminent fall in real estate market are:

  • 75 bps Rate hike by India central bank in 2011 has had debilitating effect on families who have been thinking of a new house purchase. Rising borrowing costs and inflation are reducing ability of Indian families to purchase a house.
  • With more interest rate hikes from RBI in the offing, macro environment is expected to continue to get tougher. Therefore, the risk of an accelerated downturn in sales still remains.
  • Lower Loan/Equity ratio: RBI has now instructed banks to accept nearly 20% of house value as equity portion from the buyer thus effectively reducing the ability Indian families leverage to buy a home.
  • Developers borrowing cost: Rising borrowing cost have also effected developers who now find it difficult to complete projects.