Why the real estate market could crack in 2013

For middle class Indians, investing in property has been the surest bang for the buck. On an average, property values have quadrupled in the last decade.

But now there are increasing signs that the dream run that real estate has enjoyed over the last decade could be coming to an end. Real estate practitioners point to slowing sales and rising inventories. As this story in The Economic Times explained, there is a glut of independent homes in south Delhi. Around the country, in separate micro-markets, the story is no different.

And so the question: could 2013 be the year when real estate begins to crack?

First, lets start by looking at the last period of low economic growth. Between 1995 and 2002, the Indian economy chugged along at an annual rate of 4.9 percent. Those who’ve been in the business long enough will tell you that real estate prices eased by 2-3 percent a year across large cities. “So by the end of 2002 you had a 20 percent decline but the year-on-year decline was very gradual,” according to a Mumbai-developer who declined to be named.

According to him three years of 5-6 percent growth and the situation could be repeated.

Second, the rise of the professional real estate investor. The last 10 years have seen a growing number of middle class Indians trying their hand at the property market. Their speculative behaviour is not unlike that of middle class Americans who during the go-go years bought houses only to flip them a couple of years later for a 15-20 percent gain. That came crashing down in early 2008 and the rest of the story is well known. It is only now that housing prices in America have started to rise.

India circa 2013 is no different. Dinner parties are filled with casual conversations on which apartment or piece of land to invest in. There’s this sweeping confidence in real estate giving a 20-25 percent return every year. According to Sanjay Dutt, chief executive at Cushman and Wakefield, if a developer sells 2,000 flats and 70 percent of those are to people who plan to put them on the market in a couple of years, those shouldn’t be counted as sales.

This leads to a situation in large metros where houses in under-construction projects are available anywhere between Rs 1,000-1,500 less than what the builder is selling them for. Those who want to sell houses are willing to take a small haircut. What happens when this becomes too acute is not too hard to see. The market would correct.

Lastly, according to the Ministry of Housing and Urban Poverty Alleviation, 11.09 million homes in urban areas are lying empty. Sellers are holding out in the hope that capital values continue to appreciate while buyers find the prices too steep. When that stock comes on stream this could also portend a correction.