Sunday, July 5, 2015

Is the Indian Real Estate Market Still Booming or Has the Bubble Burst Already?

The Indian Real Estate Market has been the preferred choice of investment for many many years and in fact, if you dont own a home, you are looked at as someone who isnt successful in his/her career or life. The first thing parents expect their son or daughter to do after they land a job (of course - second in the pecking order after marriage) is to buy a home. This healthy influx of potential new home buyers has kept the Indian Real Estate Market in a "Boom" phase for a very long time. 

I had posted an article last November titled The Current State of Real Estate Market in India

This article is a continuation of that. The purpose of this article is to check whether the Real Estate Market in India is still Booming or whether the Bubble has burst already. I would recommend you read the earlier article to gain insights on what my opinions were at that time to make more sense of what am about to say here... 

The Key Indicator - Demand for Residential Homes 

One of the Key Statistical Indicators of how well the Real Estate Market is doing is the "Demand for New Homes" parameter. If we check the market statistics for the financial year 2014-15 you would see that the demand is down 21%.  

If you check the last years article you would notice that the same parameter was down by over 20% for the financial year 2013-14. This effectively means that the demand for residential homes has been coming down by 20% or more for the past two consecutive financial years.... 

Another Good Indicator - Launch of New Projects 

Another Statistical Indicator that can tell us how well the Real Estate Market is doing is the "Number of New Projects" that are being launched in major cities/towns across India. The Data for the period 2014-15 financial year shows that the No. of new projects launched is down by over 35% as compared to the previous fiscal year. 

So, Why is the Demand Low and the No. of New Projects being launched going down?

There are many reasons for this:

1. Over Supply 

Everyone would agree that there are more homes out there to buy these days than folks who are willing to buy them. Just like any other industry, when there is surplus supply demand is bound to go down..

2. Price & Affordability

Everyone would agree again that property prices are still very high across the country and haven't really come down. Though the demand for houses have come down the prices of homes haven't come down by much. In fact, year on year the prices are not down by more than 5% whereas the demand is down by over 20%. 

Whenever the demand for a certain product comes down, the manufacturers usually offer discounts and cut prices to boost the demand. The Real Estate Market on the other hand hasn't done that much because of the huge volume of black funds that have been channeled into real estate projects. When someone is bringing in unaccounted funds into a project and trying to turn black to white, they would not mind waiting a few extra months for their funds to become white...

Unless the prices come down more, homes would still be termed as unaffordable by most of the middle class population of our country. 

3. Delayed Delivery 

One of the main reasons why new large projects are not being started is that the "Consumer" has woken up. Up until last year, large real estate promoters took their time in handing over their projects to their customers and did not really bother much about it. 

Statistics show that - of the large residential projects launched between 2008 and 2013 almost 50% were delayed by around One year and almost 20% have been delayed for over 2 years or more. 

Thankfully the National Consumer Disputes Redressal Commission (NCDRC) has actually forced Unitech one of India's largest real estate promoters to compensate home buyers whose projects were delayed. The company was willing to compensate their customers by 1.8% while NCDRC instructed that the compensation must be 12% per year for the delays and any further delays must be compensated @ 18%. 

With this revolutionary verdict, troubled home buyers whose builders have taken them for a ride are actually consulting legal opinion to get compensation. On the contrary builders are now thinking of ways to make sure they finish their projects on time to avoid paying compensation to their customers... 

An interesting point to note here is that, one of the main reasons for delayed delivery is actually the reduction in the launch of new projects. Real Estate developers usually spend the funds they collect from the launch of their current project to pay off earlier debt and use the funds from their next project to finish their current launch. All this works extremely fine as long as they have new projects launched in regular intervals. When they cannot launch a new project, they most likely may not have enough funds to finish their current projects and the backlog of pending projects just keeps increasing...

What to Expect From the Real Estate Market - In the Coming Months 

I Strongly feel that the Indian Real Estate Bubble has burst already. With the reduced demand, lack of new projects and the lakhs of already completed homes that havent found buyers yet, the market is braced for tough times. 

In the coming months, you can expect the following:

  • Property Prices will start going down 
  • More and More home buyers whose projects are delayed will start suing the big promoters
  • New Project Launches will slow down even more 
  • Stock Prices of Real Estate firms will either stay flat or go down

The coming few months are going to be very tough for the Indian Real Estate Market. I will put up another review of the state of the Indian market after another 4-5 months.

Some Last Words:

If you are a first time home buyer, dont let this negativity bog you down. Look for a reputable builder and try to negotiate a discount. With the demand for homes at an all time low, chances are that you may end up with a pretty good deal. You should not wait for prices to go down to purchase your first home. 

If you are a second/third/investment home buyer - wait for the market to recover. There is a very good chance that the prices will go down and if you want, you could wait for the same. 

Hope you found this article useful.. Do share the same with your friends... 

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