October 26, 2008

Today this news in Business Standard caught my attention. Funny as it may sound but this is the level of desperation in realty sector in India. After unprecedented rise, defying all logic, over last 5 years, reality sector is getting some reality bite. So to beat the blues, there are offers like one flat free on purchase of another, free luxury cars, free parking space, free registration, and free interior decoration. Seems like too many FMCG marketers joined the realty sector in last few years!

These offers tell another story. Despite desperation, realty firms are still optimistic. That's the reason behind these freebies. In blind hope that things would improve in coming months, they are not ready to go for outright reduction in realty rates. Instead, they are holding on to astronomical rates and trying to beat the 'temporary lull' with freebies. But the fact is that this is not a 'temporary lull' but a market reality requiring price correction that has been preponed due to economic slowdown. Freebies may continue for a while but ultimately the prices of realty is going to see a sharp fall, may be a crash, in next 3-4 months.

No where in the world, realty prices rose as fast as in India. Price was getting doubled every year in last 2-3 years. Everyone irrespective of the money in his pocket was buying a flat. Thanks to low interest rates over last 5-6 years, financing a house was easy and banks were ever willing to get you the dream house. Cut throat competition in the banking sector ensured that rigorous checks and balances where given a miss while sanctioning the loans. So, every 23 years old lad, who was just out of the college and earning Rs 25000 a month, was buying a house! The realty prices just kept going north. Builder kept developing more and more property buying land at unjustified prices.

Gradually, interest rates too moved north. With the arrival of economic slowdown, things suddenly started turning topsy-turvy. Banks started facing music. Firms started talking of pink slips. Big pay hikes and amazing bonus seemed to be thing of past and threatened to follow the Hindu growth rate once again. With money becoming tight, buying property went several notches down the priority ladder. But over-optimistic, perhaps greedy, developers ensured there was a surplus of newly developed and under developed realty. With hardly any buyer and a realty bubble getting bigger by each passing day, evergreen laws of economics were bound to takeover. And they did!

It seemed that the party would never end. But seldom has that happened. All good things die a natural death. Indian realty boom is no different!

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