Is India’s real estate market about to crash?

High prices, drying up of bank lending and government efforts to reduce black money could possibly result in a crash in realty prices in India’s metropolitan cities, according to a report by brokerage firm Ambit Capital.

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In addition, rental yields in property markets in India have remained extremely low as compared to its other Asian peers.

“Whilst the RBI’s Housing Price Index suggests that prices have moderated on a pan-India basis, data from property websites suggest a deeper slowdown in India’s large cities, with prices falling by 7-18 percent y-o-y,” the report, authored by Ambit’s Saurabh Mukherjea and Sumit Shekhar, says.

“Our visits to five property registration offices in Mumbai suggest a sharp drop in the registration of new residential properties and data from property valuers in Maharashtra and Tamil Nadu suggest that transaction volumes have fallen by 10-15 percent per annum for three consecutive years now. Also, new launch volumes are down 40-80 percent on a pan-India level,” it adds.

This slowdown in realty is also evident from the fact that there has been a sharp decline in cement production on a pan-India basis. Data released by the Office of the Economic Adviser, the Ministry of Finance, suggests that cement production has dropped significantly in recent months.

Ambit Capital’s report suggests that Mumbai real estate prices need to fall by up to fifty percent in order to reach sustainability.

The report dives deep into a number of factors regarding supply and demand that have contributed to the stress in the real estate sector. These include a lack of financial support given to property developers by local banks; a cut in government subsidies by the ruling NDA party, that has checked the ability of politicians and developers to pilfer construction funds; a high level of available inventory in tier-1 and tier-2 cities; the introduction of the Black Money Bill that’s caused a reluctance among wealthier families to invest in real estate; and an 8 percentage point gap between gross rental yield and bank base rates that highlights the unattractiveness of real estate for investors.

The situation is so bad that even though builders have little wiggle room to reduce prices, many are doing so, even if it means selling units at a loss, said Orbit Corporation MD Pujit Aggarwal in an interview with CNBC-TV18.

“They will sell in order to meet cash flow requirements such as interest payments, overhead costs or further construction,” Aggarwal said. “Till now, builders had been reducing prices through indirect means such as the 80:20 schemes and interest free EMIs, but a direct price reduction is absolutely on the table now. We will witness that in the months and quarters to come.” witness that in the months and quarters to come.”