Why the real estate market could crack in 2013

For middle class Indians, investing in property continues to be the surest bang for the buck. On an average, property values have quadrupled in the last 10 years.

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

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

First, lets start by considering 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 for enough time will tell you that real estate prices eased by 2-3 percent a year throughout large cities. “So by the end of 2002 you had a 20 percent decline but the year-on-year decline was very gradual,” based on a Mumbai-developer who declined to be named.

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

Second, the rise of the specialized real estate investor. The last 10 years have seen a growing number of middle-class Indians trying their hand at the property market. Their risky behaviour is not unlike that of middle class Americans who throughout 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 just now that housing prices in America have began to rise.

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

This leads to a circumstances in large metros where houses in under-construction projects are accessible anywhere between Rs 1,000-1,500 less than what the builder is marketing 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 find out. The market would correct.

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