India is another strange one in terms of the fact that it is more of a strong country that has recently had an anti-recovery, than a country wracked by the financial crisis and recently recovering out of it. However, India's property industry is responsible for its own for failing to learn the right lessons from the global crash and failing to act accordingly.
Before the financial crisis how many times did you hear the word bubble being attached to the US or UK property markets, let alone Dubai or Spain? Very rarely. Now, after the fact we all know that the rapid price escalation in these countries and many more was inflating a bubble.
Ever since this realisation we have also become hyper-sensitive about bubbles; wherever we see prices growing fast now, even if that growth is a fraction of that seen in Dubai for example before the bust, we are calling bubble. Better safe than sorry. But India is not an example of this though, rather, India's property industry has failed to be sensitive enough.
When the global property market crashed man Indian developers went bust as the bottom fell out of the luxury market, which had been the focus of the market. Millions of people in need of social housing and Indian developers building swanky condos for foreign buyers was yet another example of speculation gone mad. When things went pop the developers not culled realised their mistake and began to turn their attention to the country's need for social housing.
With the Indian economy still growing and the massive and growing population, this policy led to a revival in the housing market and the fortunes of its benefactors. Unfortunately they failed to learn from the mistakes of the past and as a result the Indian property market is in real danger of having its real crash now. The following snippets are from a propertybytes article in Mar 2010 from marketresearch.com and sum up what went wrong; in 2010 the market revival was complete and the market, although dominated by affordable housing was doing well, but already developers were eyeing the luxury segment once again.
"The housing construction industry is poised for double-digit growth in the backdrop of large population base, rising income level and rapid urbanization in search of employment."
"Presently, the affordable housing, basically targeted at economically weaker class and low income groups, constitutes the majority of the Indian housing industry, both terms of value and volume." However, medium and luxury housing is expected to witness significant growth in coming years as this market segment is comparatively very small and has huge potential for further developments."
"As far as super luxury housing segment is concerned, latest industry trends and developments are skewed towards the segment. MNCs have again begun hiring expat employees who are provided with the luxury housing benefits."
Developers once again began to target the luxury segment, and they began to run up huge debts in order to do it.
The change started in March 2010 when interest rates began to rise. Between March 2010 and October 2011 interest rates were increased 13 times, with the 13th increase taking rates to 8.5% in October. This triggered rising commodity prices such as cement and steel as well as labour costs and falling sales and prices. According to a Knight Frank report in November, 75% of flats costing approximately Rs 75 lakh were lying unsold, prices in some Mumbai districts had fallen 5-15% in 9 months, and luxury developers had dropped prices by up to 25% in favour of an upfront payment.
Developers have been hit from all sides and recently have begun to look extremely overleveraged. As cash flow becomes a bigger and bigger problem many are predicting that one or more developers could be forced to make some serious price reductions to survive. As we have all seen, a few or even one developer slashing prices can be enough to bring about a crash.
Read more about India in the IPIN Member exclusive BRICs reports here
- Tuesday 13 March 2012