Real Estate - Whats the real deal?

Real Estate, the word used often used casually in conversations has developed new connotations. After sharp price rises over the past few years, it would seem more appropriate to use words like “unreal” or “surreal” to describe the market. Saying prices have gone through the roof wouldn’t be an understatement; the sky seems to be the limit, quite literally!! The rapid rise in land rates has made spawned a whole new class of multi millionaires. The flip side of the coin is, owning real estate has become a herculean task, especially for the burgeoning middle class in India.

An analysis behind the sharp surge in the Real Estate market suggests apart from demand and supply issues it is a fear psychosis about rising rates which has supported prices. True, the availability of land in mega cities like Mumbai has remained more or less static whilst demand has risen exponentially. Enormous wealth creation has seen a jump in the incomes and hence spending capacities of people. Apart from the availability of wealth, it is a fear of rising rates in the minds of people that has lent support to prices. Though there are signs of a slowdown, a “correction” hasn’t been witnessed in the recent past.

Things looked hunky dory for the market about 3-6 months ago, apparently things have soured since then. It would be difficult to ignore the macro economic scenario we are in at present. Rising energy costs, galloping inflation and interest rates heading up north. Rising interest rates seem to have taken sheen off the market, as it has made servicing loans more expensive. Fresh loan issuances have also been adversely impacted.

Assuming things are likely to keep going up is naïve to say the least. All asset classes are vulnerable to corrections, even the so called “safe assets”. An example which can be cited is the US housing market; the collapse of the sub prime mortgage market had ripple effects on the global economy. Investments in this market saw some of the world’s biggest banks writing off US$ 400 billion, apparently the crisis hasn’t ended. A crisis of this magnitude doesn’t look likely in India given the vastly different structure of the Indian market.

It wouldn’t be surprising to see a correction in the Indian real estate market, a long anticipated correction at that. Will the investors waiting on the sidelines enter in case of a correction? Logic seems to suggest “yes”, experience or wisdom suggests quite the contrary. An example which can be illustrated here is the Indian stock market, investors were comfortable buying stocks when the Index was trading at 22–23 times forward earnings, now when valuations are around 12-13 times its apparently doomsday, there’s an all pervasive atmosphere of fear.

Well, to cut a long story short it would be good to see a correction in the real estate market as it would throw up interesting investment opportunities. Is a shakeout imminent? I tried gazing into a crystal ball and coming up wit an answer. Unfortunately all I could see was a hazy and foggy picture. Hardly a surprise, that even crystal balls would seem to be of little help when trying to gauge the sentiment of hordes of people who still nurture dreams of owing small pieces of the pie known as the Real Estate market.