Indian real estate prices will crash and will crash heavily. Why? There are good reasons for that. There are many people in India who do not believe in a real estate bubble in India. Simple reason – they have never seen one and they are used to seeing prices doubling every year.
However, I do see a bubble here. It is a bubble and it is a big bubble. The reasons are clear. As an example, one acre land in a rural area of one of the southern states costs approximately Rs 75 lakhs today. I had an opportunity to see these lands going for about Rs one lakh per acre in the early nineties. In 20 years the land prices have gone up 75 fold (not percent!). Depending on the location the prices have gone up in the range of 50 – 100 times!! Let us not worry about inflation as I’m going to present only a comparison. Let us look at the increase in income during this period. The average income levels went up about 5 times during the past 20 years. The gold price went up about 7 times. Let us take into account the population growth as that may have caused some additional demand for the land. The Indian population only grew about 1.5 times during these 20 years. So, definitely it is not the demand and supply issue that caused this phenomenal growth in the real estate value. It is pure SPECULATION! As the middle class population expanded during the economic growth during the last decade, they found a very interesting investment tool. Real Estate! Everyone thought that real estate prices always go up and it is a safe investment. Having lived and seen the housing bubble in the US, I was always skeptical. The basic economy always works the same way irrespective of the country. Demand and supply can only determine the long term prices. The hype and speculation can boost the prices for short term but cannot sustain at that level for ever.
Then how do you justify the 75 times increase in house prices over 20 years when income went up only 5 times? That is called bubble and bubbles will always burst. The consequences will be heavy – many will lose their lifelong savings that was invested only in real estate. In an open market only demand and supply can determine the long term price of any service and product. Speculation will only speed up the process – both bubble forming and bubble bursting. When I started predicting this imminent burst couple of years ago based on the historical learning from the US and Japan markets, I have heard friends saying that India is different and real estate prices will never go down in India, though it may be stable for some time. There are economists with similar views. In my view, if the current real estate prices sustain forever, it will be unrealistic and unscientific. There is a big price correction waiting and I truly believe that. I hope it does not ruin the Indian economy.
Could the government have prevented this sharp increase (bubble)? Yes, if they had implemented proper valuations and increased tax collection during transactions the price rise would have been much slower and we may never have reached this bubble.
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