Last weekend, I linked to a post which had a report from Lloyds TSB International about India being the fastest real estate market in the world in the last decade where property prices have risen by 284%.
This reminded me of a comment that was posted on the Suggest a Topic page some time ago, here it is:
You should write some articles on HUGE REAL ESTATE MARKET in India. Where are we heading? Are we going USA / Europe / UAE direction? OR India has potential to absorb all the way and will come out stronger and not like these other countries faced the position in real estate.
My opinion on this is that the price rise we have seen in the recent past is simply unsustainable but whether the whole market will collapse the US way, and a bubble in that sense is forming – I don’t know.
I’ve stated this view several times in comments earlier as well, and I have many reasons to think this way, but I’ll talk about two today, which have been on my mind recently.
In big cities where house prices are really high, for most people, there is no way to buy a house except to take a substantial loan and then be burdened by an EMI for a very very long period. I know a few people who have done this and the negative impact this makes on your lifestyle far outweighs any benefit that you get out of this.
I think sooner or later a lot more people will come around to this view and resist the peer pressure which is largely the reason people make these type of commitments in the first place.
The second reason is to do with land acquisition and developing real estate, which is a huge problem right now. There is a lot of land that developers aren’t able to acquire and in cases where they are able to acquire land, they sit on a lot of it so that the prices don’t collapse.
There is corruption and policy paralysis, and a great example of that are the thousands (if not lakhs) of buyers in the Greater Noida area who are stuck with EMIs on houses that don’t see much hope of getting constructed, and are in a terrible situation right now.
This situation also needs to change or demand for units that are under construction will fall down because anyone who has witnessed the hardship that you have to face if your money gets stuck in such a developments vows to never get into another transaction of this type ever again, and strongly influences anyone who is watching the situation.
In my opinion, the consequence of this will either be an improvement in supply where policy making is better or a reduction in demand because of the uncertainty such a thing brings about and both will lead to fall in prices.
Finally, from the perspective of an individual, I think you have to see how much sense it makes to buy a house thinking of it as an asset when deep down you know it is not likely that you will sell it because you are making a profit, and it will behave more like a liability because of the huge EMI burden that it places on you.