Why there may not be a property bubble this time

By Ketul Shah

Since the year 2002, we have seen a long bull run for real estate market. A similar trend in real estate was witnessed in 1992 till 1996. After 1996, the property market was just flat for the next five years. From the year 2002, this is the fifth bullish year of high property prices. In 2001, if we would have talked about such property prices, people might have laughed at us. But now we have seen such prices in reality. This is the effect of the bull run.

Let's check which factors have contributed to this bull run in the real estate market: 

1. There has always been a shortage of residential property in India and therefore property market was just waiting for a trigger, which can start the demand flow in real estate business in India.  
2. Banks have put their concentration more in housing finance since 2001. Liberal credit policy and attractive rate of interest allowed easy money flow in property market. This triggered the increase in consumer demand for houses.
3. One of the biggest contributory to the market was IT (Information technology) and ITES (Information Technology Enabled Service) industry. They have seen a good growth in their business and have come up with a huge requirement of infrastructure for themselves. Their employees with higher income started thinking about owning a house for themselves. This turns out to be a fresh demand since 2001-02.  
4. With growth of IT and ITES companies, people started moving to Bangalore, Hyderabad, Mumbai, NCR (National Capital Region) and other cities. This opened an opportunity for an investor to fetch good rental income. Investor's were eyeing 10-12% rent, that became realistic. 
5. Later part of 2002 has seen a growth in all the sectors. With increase in demand, prices of steel and cement have gone up more than 100 - 125%. This increased the construction cost and therefore property prices went up.   
6. The Government has also contributed to this growth. It relaxed the FDI  (Foreign Direct Investment) rules for the real estate market. This has allowed some foreign players like Ascendas Pvt. Ltd. (Singapore), Tishman Speyer (New York), Portman Holdings (Atlanta) enter the Indian real estate market. This brought more funds, advanced technology in Indian real estate market. Government increased the limit of interest deduction on housing loan to Rs 1.50 lakh in 2001. This encouraged home-buyers to opt for housing loans for purchasing a house. 

And thus we have seen a steep growth in property prices. This has led to 100-500% price rise in many parts of India, a phenomenal price rise. No investment gives such lucrative return on investment. Now we think, will history be repeated like 1996 when real estate market has seen a blood bath? In the year 1996, when a common man couldn't afford such higher market price, real estate market's bubble burst. 

Bubble; in financial language, any long bull run creates a bubble. If people keep buying any item for a long term, demand remains high and that pushes the price upward. When people stop reacting to such unrealistic higher prices, demand suddenly decreases in the market and that leads to sudden price crash. This is referred as 'Bubble Burst'.

Now returning to our discussion - will there be a bubble burst again in the real estate market like there was in 1996? I think this time history will not repeat itself. In 1996, property prices went down up to 60% at few places. This was a phenomenal crash in property prices. The difference between 1996 and 2006 is the type of demand in the market, plus over all market condition. This time, demand is more realistic and very less speculators have entered the market. All the other sectors (Banking, IT, Media, Production houses etc) are also growing. This makes current bull run in real estate looks more healthy and realistic.

At a time when we are talking about a bubble burst in real estate market, we shall re-look at all the factors, which have contributed to growth in 2002.