A recent report by Ambit Capital shows the real estate market in India is beginning to decline. Property prices have fallen by between 7% and 18% in the largest cities in the country over the past year.
Apparently property prices in Delhi could have gone down by as much as between 20% and 25% over the past 12 months. The number of transactions has also fallen dramatically. The situation is also quite bad in the smaller cities such as Lucknow, Jaipur and Rajkot where there are signs prices have corrected by as much as 15 to 20% year on year. In addition sellers are finding it hard to receive bids for properties recently put up for sale.
Perhaps this price correction is to be expected as property prices in India have been going up by an average of 20% or so each year for more than 10 years while actual interest rates have been between 7% and 10%. As a result experts have been forecasting that the real estate bubble in India would eventually burst for the past two or three years. Due to the large gains in property values over the past few years, many people have taken out loans to take advantage of the 10 to 13% difference between interest rates and the property price increases. Considering the considerable increases in property values, a correction is only to be expected.
The article in rtn.Asia points out that the rental yield in Mumbai is approximately 2% whereas in other places like the Philippines and Indonesia rental yields are typically between 7% and 8%. According to Ambit, if a real estate market is priced correctly, then the rental yield tends to be somewhere close to the cost of borrowing but this certainly isn’t the case in Mumbai. This hasn’t worried people investing in the property market as they are not looking at the rental yields but rather the capital appreciation. Even if the rental yield is only 2%, if the price of the property goes up by 15% then the total return is 17%.
Property price increases of around 5% annually are considered to be far more sustainable and when combined with the fact that interest costs are approximately 10%, then the actual yield should be about 5%.
Ambit believes the real estate market in India is about to burst due to a number of different factors that include the slowing pace of construction job growth to fewer new launches and a slowing number of loans being given out by the banks. Worryingly, the report by Ambit pointed out that some banks have up to a third of the total loans in real estate and could be at risk if prices sharply correct.