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Realty bubble set to burst?
Anuj Puri, Moneycontrol.com | June 18, 2007 18:56 IST
The high appreciation rates that India's property market is currently witnessing, is due to the interest rates reduction that the National Democratic Alliance government instituted after 2001.
The very amenable borrowing rates encouraged individuals to avail of home loans to buy residences, while up to then actual property purchase had only been an option for the considerably rich.
This resulted in a huge demand for quality real estate all over the country post 2003. Since March 2005, Indian real estate rates have displayed an unstoppable upward curve. This is directly related to the opening up of foreign direct investment in real estate. The market has been expanding at an unbelievable rate of 100 per cent plus. This can also be traced to the heightened NRI interest in real estate.
Many presently feel that the Indian real estate market is a bubble, and will eventually burst. It is true that residential rates in many Indian cities like Mumbai and Delhi are comparable with property rates in the West now. However, let us take an investor's point of view of this phenomenon.
Behavioral finance has repeatedly proved that whenever asset prices start escalating, the initial interpretation has been of a 'bubble'. In-depth analysis of price appreciation in real estate and the reasons thereof would help in comprehending these fears. Price appreciation in real estate is backed by the following fundamentals:
With land always being a scarce resource, property prices would follow basic economics of demand-supply and pricing, whereby property prices seem to have increased.
The author is chairman and country head -- Jones Lang LaSalle Merghraj